Chart Industries Inc (GTLS) 2014 Q2 法說會逐字稿

Good morning and welcome to the Chart Industries Incorporated 2014 second 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 Thursday, August 7. The replay information is contained in the Company's earnings release.

Before we begin, the Company would like to remind you that the 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 statement.

For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the information regarding forward-looking statements and risk factors including 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 statement. I would like to turn the conference call over to Mr. Michael Biehl, Chart Industries' Executive Vice President and CFO. You may begin your conference.

Thank you, Brad. Good morning everyone. Thanks for joining us today. I'll begin by giving you a brief overview of our second quarter results. And Sam Thomas will provide comments on current market trends we see in each of our business segments. I'll then finish up by commenting on our outlook for the remainder of 2014.

Reported net income for the second quarter of 2014 of $20.1 million or $0.65 per diluted share. This includes acquisition related to the facility start up costs of approximately $2 million or $0.04 per diluted share. The 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 second quarter of 2014 would have been $0.70 per diluted share. This compares to second quarter of 2013 net income of $20 million, or $0.64 per diluted share. The prior year quarter earnings would have been $0.70 per diluted share, excluding $4.8 million of acquisition related costs and flood damage expenses sustained at our Decin, Czech Republic facility, as well as $0.02 per diluted share impact associated with the convertible notes.

Sales for the quarter were $307 million and represented an increase of 3%, compared to net sales of $298 million a year ago. The improvement was largely due to additional project volume in the E&C's process system segment, offset by shortfall in biomedical commercial oxygen generation systems.

Our gross profit for the quarter was $92.2 million, or 30% of sales. Compared with $89.8 million, or 30.1% of sales a year ago. Gross profit improved as a result of higher project revenues in the E&C and a favorable product mix in D&S. In addition, lower volume in commercial oxygen generation system projects, along with higher respiratory warranty costs in biomedical, partially offset some of the improvement.

With respect to the E&C business, sales increased 18% to $93 million in the second quarter, led by improvement in our process systems segment with higher LNG and natural gas processing related projects. Gross margins were 26.5% compared to 29% in the prior year quarter. Decline in margin percentage was due to larger volume of both lower margin base load LNG, industrial gas related projects. In addition to start up costs of the E&C's new facility in Wuxi, China and it has expanded across the Wisconsin facility.

In D&S, second quarter sales increased 1% year-over-year at $149 million, as LNG sales in North America and Europe offset lower than expected China LNG shipments due to customer delays. Gross margins for D&S improved to 30.6%, compared to 28.4% a year ago, due to regional and product mix weighted more towards higher margin products. The result also include the [favorable] impact from resolution of an LNG contract, which was partially canceled during the quarter. This normalizes the year to date project margin as it offset costs incurred during the first quarter.

In our BioMedical business, sales declined 10% to $65 million in the second quarter 2014, compared with $72 million for the same quarter in the prior year. The decrease represents lower sales of commercial oxygen generation systems, due to lower than anticipated large project orders for this product line and delays in project timing. While BioMedical respiratory therapy business finished $2.2 million short of the prior year, it improved 35% sequentially. We're beginning to see positive signs in the global respiratory market.

Our cryobiological storage business grew 14% year-over-year and helped offset the shortfall in the respiratory business. BioMedical gross profit margin declined to 33.8% in the quarter, compared with 34.7% for the same period in 2013, due to lower volume in commercial oxygen generation systems and higher warranty costs associated with respiratory therapy products.

SG&A expenses for the quarter were $53.7 million, up $1.8 million from the same quarter a year ago. The increase was largely due to higher employee related costs, primarily in D&S, LNG. And we continue to invest in growth opportunities along with start-up costs associated with E&C's Wuxi acquisition in China, which closed during the quarter. SG&A is a percentage of sales was 17.5% compared to 17.4% in the prior year quarter.

Net interest expense was $4.1 million for the second quarter. Which included $2.6 million of non-cash accretion expense associated with the Company's convertible notes. Cash interest of the quarter was just $1.5 million. Income tax expense was $8.8 million for the second quarter, and represented an effective tax rate of 30.2%, compared to an effective tax rate of 27.9% in the prior year quarter. The increase in the effective tax rate was due to the expiration of the R&D credit at the end of 2013, in addition to a higher mix of US earnings that are taxed at a higher rate. I'll now turn the call over to Sam Thomas.

Thank you, Michael. And good morning everyone. While we face some near term headwinds this quarter we remain confident in our go-to market strategy and the long-term global growth drivers in the markets we serve. Sequential orders improved in the second quarter 2014 from the first quarter of 2014, as D&S and BioMedical both grew in excess of 10%, while E&C was lower by 13% due to timing of project awards.

We're very excited by the announcement of three significant awards for liquefaction over the past 60 days, including the two awards we announced today. Which will be reflected in our third quarter backlog. This represents in excess of $80 million of new LNG awards during that period for our E&C business. Demand for small to mid-scale liquefaction plants continues to grow and represents one of the most cost effective avenues to provide LNG as a fuel for transportation.

Our D&S business continues to grow globally as we saw a 19% increase in sequential order intake. Demand for LNG equipment worldwide continues to grow and we see more balanced global interest led by demand growth in Asia. We've made progress during the quarter in ramping up our La Crosse, Wisconsin brazed aluminum heat exchange facility expansion. Additionally, we held a ground breaking in China at our new greenfield site near Changzhou, as planned. Finally, we closed the Wuxi acquisition in China.

Let me comment now on specific highlights for each of our business segments. Our E&C business booked $57 million of orders in the second quarter, including the previously announced LNG holdings liquefaction plant. While this is down sequentially from the $65 million we booked in the first quarter, timing of award projects are often lumpy, as evidenced by today's announcement of two awards for more than $60 million in the third quarter.

Small to mid-scale LNG opportunities continue to evolve. These facilities will use Chart's proprietary liquefaction technology and will be used for diesel replacement merchant supply. Our capacity addition in La Crosse enables us to typically manufacture a standard LNG plant in 12 to16 months, delivering the fastest turnaround time from final investment decision to delivering LNG available in the market.

We also announced the floating LNG project award today from Black & Veatch. We will be providing multiple cold boxes, each containing brazed aluminum heat exchangers. Chart's heat exchanger technology and know-how delivers unique advantages for use in floating applications, due to size and capacity flexibility.

We closed our E&C acquisition in Wuxi, China during the second quarter. As a reminder, this acquisition will add manufacturing capacity for low-pressure brazed aluminum heat exchangers, for air separation applications and fabrication of cold boxes for LNG liquefaction and other petrochemical projects in Asia. We have already begun the process of moving our current E&C cold box fabrication operation out of the D&S facility in Changzhou, China. We anticipate this transition and associated startup-related spending to be complete during the third quarter.

We continue to see opportunities from shale gas development, whether dry, wet or associated with tight oil production. The recent introduction of bakken flare gas regulations in North Dakota is a good example of how Chart products can help companies achieve regulatory hurdles.

Moving on to D&S. We booked orders of $163 million in the second quarter, which includes an $8 million reduction from the partial contract cancellation announced in our previous earnings release. Despite that adjustment, second quarter orders were up 15% from our first quarter orders of $143 million. Sequentially, for LNG related orders, China continues its growth, delivering a 9% increase. In the US, we experienced strong LNG order growth of 18% from the previous quarter.

During the quarter, we announced a strategic supply agreement with Hanas New Energy in China to supply 50 permanent LNG fuel stations over the next 30 months. Today, we've received approximately $7 million in orders associated with this agreement. We broke ground on a greenfield site near our Changzhou operation during the quarter and expect a completion in the first half of 2015. Despite lower than anticipated China sales in the first half of 2014, which we view as a timing issue, the market continues to grow as our orders remain strong. We are confident of the long-term growth in China and this expansion will allow us to meet expected future demand.

North American industrial gas activity has continued to improve during the second quarter, as we saw a 23% increase in sequential order growth from the first quarter and a 14% increase in revenue after the weather related impacts we experienced during the first quarter. Our LNG vehicle fuel system production for the US market continues to grow steadily. Volumes for the first six months of 2014 exceeded that of all 2013.

In Europe, both industrial, gas, and LNG demand is improving. We continue to innovate. For example, we are now working with VTG, a leading European railcar leasing and logistics company on LNG railcar prototypes. And we are the first LNG truck fuel tank manufacturer to receive ECE certification.

In our BioMedical segment, orders of $61 million were up 10% compared to $55 million in the first quarter. Respiratory orders were up 7% from the first quarter. And as Michael mentioned earlier, sales for respiratory therapy equipment in the second quarter improved 35% sequentially. We're cautiously optimistic as we continue to see signs of an improving US respiratory market. We will monitor the market closely while we continue to focus internally on cost reduction initiatives.

Cryobiological cold storage orders were up 12% from the first quarter and 10% from 2013. We formed new customer relationships that will allow us to meet developing customer needs further, as anticipated spending on R&D grows, especially in Asia.

On-site gas generation orders for the quarter improved 46% sequentially, while sales results were down as environmental project order timing slipped into 2015. We anticipate long-term growth in this market and have improved lead times with our standard products while investing in [human] capital to prepare for the future. Mike will now provide you with our outlook for the remainder of 2014.

Thanks, Sam. As mentioned earlier, customer delays have impacted our results in D&S China. In addition Chinese regulatory approvals for mobile fueling stations and certain mobile equipment have caused shipment delays. BioMedical orders while improving are still erratic month-to-month.

These events have caused us to reevaluate our anticipated results for the remainder of the year. As such, we are adjusting our sales and earnings guidance. Sales for 2014 are now expected to be in the range of $1.22 billion to $1.27 billion. And diluted earnings per share are expected to be in a range of $2.85 to $3.15 per diluted share on approximately 31 million weighted average shares outstanding.

This excludes any dilution impact resulting from the notes or any acquisition related costs. This compares with the previous sales guidance of $1.25 billion to $1.3 billion and earnings guidance of $3.00 to $3.40 per diluted share at approximately 30.7 weighted average shares outstanding. This also excluded any dilution impact resulting from the notes or any acquisition related costs. I'd now like to open it up for questions. Brad, please provide instructions for the participants to be able to ask questions.

(Operator Instructions)

Our first question comes from the line of Eric Stine from Craig-Hallum. You may begin.

Maybe we can just start with the customer delays. Could you give me, just a little more clarity there, whether it was a handful of customers or more broad-based? And then also just provide some details -- you mentioned government approval projects and that's pushing some things out.

Yes, most of this is associated either with our IMCs or packaged skid-mounted fuel stations in China, where there have been new regulations promulgated. And it actually prevented putting new stations into operation during the period. Those regulations have now been finalized for the Beijing region, and are expected to be published shortly as a national standard. So we expect to see that move forward, but it affected a handful of customers, but a significant part of our total sales.

Yes. And those are not -- I mean, its not something that's -- its going to persist for a while, even though these are finalized and it's not something --. Obviously, you don't anticipate that you're going to make up all of that in 2014?

It's difficult. The local folks are optimistic that they'll make up a large part of it in 2014. Seeing the speed that -- and the challenges they've had, I expect it will go into 2015, particularly with PetroChina.

Okay. Got it. That's helpful. Maybe just turning to small and midscale liquefaction. In the project with Bechtel, just wondering if you could talk about what the pipeline looks like with Bechtel in those projects? And then, just looking for some feedback in the market on your modular LNG offering. I think that's been in the market for about a year, and given that that's the way the market is going, just what you're hearing from your customers?

Well, as we've announced a number of orders now for both 100,000 and 450,000 gallon per day plant -- they're in our pipeline. There continue to be a number of opportunities for companies in most regions of the United States -- East Coast, Gulf Coast, West Coast, Canada, that we're actively pursuing with a number of partners and potential customers. So I would say that the market has evolved so that there are more people looking at 100,000 gallon a day liquefiers, and now there is more activity on the larger 250,000 and 450,000 gallon per day liquefiers. So it looks very encouraging.

Okay. Maybe last one for me. Moving to BioMed, clearly some signs -- early signs of optimism. What do you need to see before you're truly convinced that there is a recovery here? And that second quarter was not just a recovery, or kind of a bounce back, from Q1?

The challenge is, as we see also with the orders in the industrial gas market, they are erratic. Customers are more positive of -- in their view of the future and see things improving. But we do see a strong month, or strong weeks followed by quiet weeks. So it's challenging to see -- to say at what pace we're actually proceeding.

It's not unlike the US GDP numbers, where we have a negative first quarter and a very strong second quarter. I can only characterize them as erratic. The optimism is there. The view is we're headed in the right directions for stronger demand and more stable markets. But in terms of orders received on a daily basis, it's up and down.

In terms of industry destocking, where do you see that right now?

I think in general, that in both North America and in Europe, the stocking levels have continued to come down.

Okay. Thanks a lot.

Our next question comes from the line of Colin Rusch from Northland Capital. Your line is open.

It's Noah Kaye in for Colin. Going back to China. Can we get an updated estimate versus what was put out during the analyst day, in terms of stations and vehicles in 2014 and 2015? And how you think your share of growth is tracking?

I wouldn't have an update since that analyst day, eight weeks ago.

I mean, I guess the question is how have these delays impacted the overview for the overall industry for the year? And do you see any reason why that will materially effect next year?

The view is very positive that activity levels are increasing. And our customers tell us that it's going to move forward rapidly, which is consistent with what we forecast at the analyst day. But it's -- to change that forecast would assume we've got precision in our forecasting ability. And our customers have precision in their forecasting ability, which clearly isn't there, based on our recent forecast.

(multiple speakers) And the order intake continues to be strong in China for our equipment. It's just -- the disconnect is on the sales side because of these customer delays, and the regulatory delays over there. So once I think that works through and again, some of it is going to push into 2015, our expectation is that 2015 is going to have the growth that we had originally mentioned at the analyst day.

And have you changed, at all, your time frame for the ramp in Changzhou?

No, we have not. In terms of the facility expansion, we continue to move forward on that. And that will be complete in the first half of 2015. And we still believe that we need to get that in place to handle the opportunities that we're going to see continuing to come forward and ramping up next year.

Great, great. And in terms of how share is tracking, you believe that the share continues to be about what you had said in terms of roughly 20% of the overall market?

Yes. I wouldn't attempt to try and give you with precision what our market share is on a quarter by quarter basis.

Sure. Understood. And finally, just back turning to the liquefaction business. Can you give us a little bit more color? You talked about your competitive advantage in terms of lead times. When do you see, for the projects that have been announced, those flowing through into revenues? And if you could sort of comment generally, from an industry perspective on some of the potential reforms to the permitting process that appear to be going on in the US, and how do think that may benefit?

I would anticipate that the majority of the revenue would be delivered on the orders we've announced in 2015. There may be some that bleeds over into the first half of 2016, depending on the overall project timing. In terms of enhancements to approval processes, I don't think in general, that that's the gating factor for moving forward on projects.

Okay. Thank you very much, gentlemen.

Thank you.

Our next question comes from the line of Kathryn Thompson from Thompson Research Group. Your line is now open.

Thank you for taking my questions today. A little bit of questions about the new projects, maybe in terms of the revenue flow through. But could you discuss the potential margin profile for these? Point one. And then point two, what can we do to gain confidence that we don't run into the same type of issues you had with another large customer in that E&C segment as these large projects flow through? So in other words, what have you done to set up some risk management on the front end to prevent margin issues going forward?

First, I would anticipate the gross margins on these projects to be consistent with the gross margins for E&C overall. Second aspect is that these cold boxes -- the cold box fabrication for these, are at a significantly lower level of complexity, are standardized designs which we have built previously. So we have a much better handle on them compared to the large base load LNG facilities, which had continuous engineering changes going on while we were in fabrication. Which was the primary source of the challenges.

Perfect. Where do you stand -- you've spoken in the past couple quarters about the flow through of lower margin projects through E&C, mostly hitting in the first half? How do these flow through in second half? And when should we think about returning or approaching to the more 30% type margin, or high 20s or low 30% type of margin for E&C?

The remaining large base load LNG projects will flow through between now and the first quarter of 2015. There is additional work going on in 2016 on one remaining cold box. But we're in active discussions of ways to improve the margins on that by providing enhanced deliveries to the customer.

Okay. Could you quantify the impact of the -- you talked about your D&S segment benefiting from a partial contract cancellation? Could you quantify that impact in the quarter just reported?

I think that the best way to do that was just -- is that, as we stated, that if you look at the year-to-date gross margin for D&S overall, which was roughly 2 margin points different between the first quarter and the second quarter. That shows that there were costs absorbed associated with that contract in the first quarter that were not reflected with any change orders. And there were relatively few costs associated with that project in the second quarter. And we came to a contract settlement with the customer. So that swing is the 1% either way on the gross margin, is generally the impact.

Okay. So about 100 basis points.

Yes.

Okay. And then finally, when thinking about modeling that BioMedical, as you've made some progress. How should we think about modeling, as we go into the back half of the year and as we roll over into early 2015? Just so we can manage our expectations so we don't get over the tips of our skis, so to speak, with margins?

For the year, BioMed will be now flat to down. Compared to last year, margins are still expected in the year to be in the mid-30%, 35% range. So we would expect a little bit of pickup in the second half.

Okay. Perfect. That helps. Thank you.

Our next question comes from the line of Rob Brown from Lake Street Capital Markets. Your line is now open.

Good morning. Just wanted to follow up on the contract push out. You said they would sort of move into 2015. Is your thinking that it would just layer into 2015 numbers or does everything slide to the right?

You're referring to China discussion?

Yes, the China discussion. I think Michael talked about, some of the revenue pushing into 2015, rather than just sort of going away. And I'm just wondering if it -- does it layer on and do you have sort of a better 2015 than maybe you thought before? Or does that just sort of push out?

We haven't forecast 2015, so I don't know how to respond.

Okay. Maybe I'll ask this way. But if those contracts sort of move into 2015, do they double up from maybe what you were thinking -- or what they were thinking to do in 2015? Or does it just sort of push the projects out and do they sort of delay everything?

That would be our expectation right now. That they would double up.

Okay. Good. And then maybe -- (multiple speakers)

You might understand that we're feeling a little bit circumspect about our forecasting abilities, particularly with regard to timing at the moment, Rob.

Okay. Yes, yes. I understand. Sorry to push you into a corner there. On the European Rail business, you talked about a project with an LNG railcar. Maybe give us a sense of what's happening with the rail market in Europe? Are you seeing -- is this just test phase? Or are you seeing some more activity in thinking in Europe around the LNG rail market?

It's serious interest and it's a real project to build prototype railcars. Our customer is fairly bullish and enthusiastic. But I don't have sufficient knowledge of the timing of the implementation in the rail industry in Europe, or the rail industry anywhere actually, to give you a good feel. I think that it makes sense and it has a high likelihood of being used. But at this stage of the development, it's very hard to call timing for commercial applications.

Good. And then last question on the LNG truck tanks. You said first half was sort of better than, or equal to, all of last year. What are the trends you're seeing there? Is that continuing to ramp into next year? And is it was some one time orders? Or what's sort of the LNG truck tank outlook for the next sort of 18 months?

It's positive. We're winning orders from a broader number of customers. We're still at, generally, what each fleet that's buying considers to be trials, or their first or second go-round. And we expect to see orders from additional fleets, additional customers during this year with continuing interest. It will be helped significantly as more LNG merchant liquid becomes available for the transportation market.

Thank you. I'll turn it over.

Our next question comes from the line of Chase Jackson, from William Blair. Your line is now open.

It's Chase Jacobson. Just a couple of questions on the guidance. First, on the revenue guidance. Is the reduction because of the delays that were experienced this quarter? Or does it take into account potential for further delays? And also, just on a percentage basis, it's small but I noticed that the reduction in the midpoint of the EPS guidance is a little bit more than the reduction in the earnings guidance. Does that have to do with the cost -- the expansion cost? Or is that just have to do with margin on what's in your backlog?

Did you mean the sales guidance? You said the EPS -- (multiple speakers)

So first on the sales guidance. Is the lower guidance because of the delays this quarter? Or does it take into account future delays also? Or risk of future delays, as well?

It takes into account, you know, sort of a lowering of our expectations because of those delays for this year.

Okay.

In addition to this quarter, on both the -- in China in terms of their business in D&S. And also on the BioMedical commercial products business.

Okay. And then, I guess the second part of the question was the midpoint of the EPS guidance was just a little bit -- was down a little bit more than the midpoint of the revenue guidance. So, is there anything to read into that in terms of the expansion cost or just margin in general?

No, I don't think so. Its just -- there, certainly, the expansion costs have an impact on the startup costs that we've had both at La Crosse and at the Wuxi facility that we factored in here now. In addition to -- there's a slight difference in the share count that we had in our forecast from last quarter that will create a $0.01 or $0.02 difference. That's -- and nothing else to read into that.

Okay. And, Sam, you have done a pretty good job over the last year on petro-chem, industrial gas. We've been hearing mixed from a lot of the contractors, in terms of what the future of the US chemical market looks like. Most are optimistic long-term. But hearing about projects being pushed out and customers going back and pressuring their supply chain. Can you give us any update on what's going on in the US chemical market, from that standpoint?

Sure. I think that the comments you are suggesting coming from the marketplace are true and anticipated. We're getting, after a number of, in particular, ethylene projects going forward. Those later in the queue, always become questionable and they're always more worried about the potential payback. You have to understand that for both the ethylene projects and the propylene projects that we participate in, the projects that have been announced and are already going forward, do make a significant difference in the total global capacity of ethylene and propylene. And we anticipate that there will be a slowdown in the number of orders compared to what we've seen over the last 18 months going forward.

So that you're apt to see only perhaps one ethylene project a year. I mean, it's just fairly typical that petrochemical capacity build out, it will be fairly strong for two to four years and then go through a cyclic lull. And I believe that there are still a couple of projects on ethylene that are apt to go forward. But I think there will be a pronounced slowdown for a period of time for several years following that.

Okay. Thank you.

Our next question comes from the line of Igor Levi of Morgan Stanley. Your line is now open.

Hello. Could you talk a bit about the FLNG opportunity? Do you see more of these type of orders in the horizons? Just looking for some color on that potential size and timing of this market for you?

We've got a number of potential FLNG projects, where we're either a key exchanger cold box supplier or potentially providing a full liquefaction package. We think it's a significant opportunity. It's very hard to weigh commercially the advantages of specific projects at this point -- and timing. But there is an increased level of interest similar to what we see for midscale LNG plants. Whether they're land-based or to be based as floating plants. I think that the floating plants are apt to be associated with relatively smaller gas fields, or stranded gas, in various parts of the world, as opposed to North American opportunities, although there are a couple of exceptions.

Thank you. And you mentioned that this was a modularized LNG system, so it fits what you provide very nicely. How big was this system for this particular order?

I don't have that readily at hand. I think I would refer you to Black & Veatch, as to what they have said.

Okay. And have you seen any change in the LNG versus CNG mix, when it comes to the demand for the Class 8 natural gas trucks?

Well, as you know, we don't participate directly in the CNG market.

Yes.

I think there continues to be sales success selling to Class 8 trucks from both CNG and LNG. With those requiring greater range being focused more towards LNG. I think our view is that both will be present for Class 8 trucks and that those that require range will opt towards LNG. I also think that LNG is apt to take a larger share as more LNG liquid is available for transportation fuel.

Great. And one last thing on the diesel emission requirements change in China, has than that been having the desired effect? What are your customers saying on that front?

I think the view is very positive, that because of the emissions requirement and the hard deadline for diesel engines, it makes the cost of an LNG-powered truck comparable to a diesel-powered truck and subject to build out of the infrastructure, which has been somewhat slowed down by these regulatory issues, and sufficient availability of LNG for transportation. We expect to see significant build out and a significant market share gain in the total truck population for LNG.

Great. Thank you. I'll turn it back.

Our next question comes from the line of Martin Malloy from Johnson Rice. Your line is open.

Going back to the US chemical market. The orders for the type of equipment manufactured by Chart, do you think most of those orders have been placed for the build out of the ethylene crackers and derivative pet-chem plants?

There's still a number of open projects. At least one ethylene cracker is reportedly going ahead that we're bidding on. And we have high hopes for being the successful bidder on that project. There are a couple of PDF plants, or propylene plants, also that we are led to believe will go forward. But I don't anticipate new projects being announced at the frequency they were 12 to 24 months ago. I think we're in a period where the expectation is that the existing plant, if we're going forward will be build out and come on stream and we'll look for more clarity of the future demand picture.

Okay. What about and market demand for gas processing and using the [Brasil Lumen] heat exchangers there? What are you seeing in terms of the bidding activity?

I would say it's stable and we would expect it to continue to grow, but at something like GDP growth levels. That what we've seen over the past 18 months, two years has been fairly consistent demand from this market.

Okay. Thank you.

Sure.

Our next question comes from the line of Greg McKinley of Dougherty. Your line is now open.

Thank you. Sam, I wonder if you could just provide a little more color on the regulatory changes in China impacting station development? Is that having any impact on, I don't know whether it's the design or specs of your product, or the cost of a station operator that might be changing the economics in either direction from an investment perspective?

No. The finalized regulations published for Yubei or the Beijing district are very consistent with the stations we have been providing, with two changes. One is a regulatory change that requires the dispenser to be a minimum of two meters away from the rest of the tank and pumping system. And the second is a requirement on access space around the tank within the container. Both straightforward for us to deal with.

For others, there are required changes to their safety systems and some of the components they utilize. So it's not a commercial or a technical issue --

Okay.

For us to comply. But we do have the time period now of fully understanding how long it takes to go from provincial authority regulation, or a national authority regulation, to local safety officials signing off.

Yes, okay. Thank you. And then just regarding some of the drivers you've cited in the past as impacting the China market. So you just mentioned NS4. In the past, we talked a little bit about just the outlook for any statutory changes to natural gas or diesel pricing. So on those two fronts, is it still the market's perception that the NS4 go-live date, is that a fixed date? Or any change of potential push out there? Any additional thoughts on the fuel pricing issues?

To my knowledge, there's been no change in the implementation date of January 1 for NS4 regulation for diesel emissions. And in terms of other regulations, the driver we've talked about earlier, the fact that natural gas prices, LNG prices, seem to have stabilized or come down slightly. And that low-sulfur diesel prices have had announced price increases and are expected as demand goes up because of the NS4 vehicles to continue strong. So the market drivers on economics are strong. I'm told there is more supply of natural gas available. I think that's one of China's biggest challenges, is growing the use of LNG to get the pollution benefit in their cities as quickly as possible, without consuming too much natural gas to make sure that they have enough for heating requirements in the winter.

Okay. Thank you. And then on this small-scale facility you announced with Bechtel this morning, can you just walk us through how the sale process typically works there? Is Chart -- when you're selling a standardized plant -- is Chart marketing directly to the company and then you bring in an EPC firm? Or is it the EPC firm that you're marketing to that the Company has already selected? How does that work?

Both models are in play. This project was developed in partnership with Bechtel.

Okay. Michael, can you quantify 2014 within E&C, that margins being burdened by these base load projects. I don't know if you have the numbers at your fingertips. But how much revenue on those type of projects will run through your P&L this year versus I think Sam mentioned, it should be completed Q1 of next year? How do those revenue numbers -- (multiple speakers)

$50 million in revenue for the year.

50? Five zero?

Yes. Five zero. And at a single digit margin.

And then next year, de minimis?

Next year, it would be the $10 million to $15 million range. depending upon -- as Sam mentioned, there are some changes that we're working on but that may add maybe another $10 million of revenue. Right now not completely determined.

Okay. And then just the last two questions on BioMed. Is it a mix shift in your product line that's changing gross margins a little bit lower in the first half than maybe they were last year? And if not, or maybe just comment on the change there and your outlook going forward?

It's a combination of one volume. Because the volume is lower, so you don't -- not absorbing as much overhead. The other is commercial products. We had a large order last year that we shipped in the second quarter that had a high margin to it. The commercial products business in there is somewhat comparable on the large projects to E&C. Orders tend to be lumpy. They're on percentage of completion, in terms of how we recognize. So the margin profile in that business is lower this year.

And then, in terms of the warranty expense for -- on the respiratory side has been at a higher run rate in the first half this year, dampening margins. We think we have a good handle on that. And that we're actually reducing pretty significantly the repair cost on the stationary product line that AirSep had when we acquired them. And it's come down pretty significantly since the time we acquired them to where we are now. We think we can continue to make progress on that, but it is having an impact on margins.

Okay.

At least the first half it did.

Thank you. And then just the last question on BioMed is, so its showed some improvement sequentially from March to June. What are the bigger picture drivers there that are going to underscore a real longer-term stabilization? Is it -- I don't know, is it lack of reimbursement rate changes? Is it inventory corrections in the channel? Whatever those are, is there anything you could add to your perspective on where we are in that cycle?

It's more inventory correction, because you're seeing a lot of -- it's pretty significant consolidation in the distributors, our customers in terms of working through. And it's hard to get an estimate on how much inventory, and when they do these consolidations [and set] -- in that they have on hand.

But that continues to work through. As we said, we're seeing positive signs, but its erratic. Ultimately, it's going to work through. People need the oxygen equipment for -- that have COPD, and we think it will stabilize. But it's not likely to happen until next year.

Okay. All right. Thank you.

(Operator Instructions)

Our next question comes from the line of Pavel Molchanov from Raymond James, your line is now open.

This is actually Justin Jenkins on for Pavel. I guess just a quick one to start on CapEx, we've seen year-to-date CapEx stay pretty low again. Would it be fair to expect a second half bump similar to last year?

Yes. I mean, we -- our expectation right now is it, it'll still be in the $80 million range. We should see some pickup in the second half of the year. There has been some delays in the China expansion, sort of regulatory things that we're working through over there. But I would expect it to be in that $70 million to $80 million range for the year still.

Perfect. Thank you. And then secondly, Sam, you mentioned the Bakken flaring rule changes in your opening remarks. Is there anything you can share from an activity perspective for the opportunities there, since the rules have been changed?

Yes, we're seeing a number of people interested in liquefiers, LNG liquefiers, for that region. And also there's quite a bit of midstream activity, in terms of consideration for building condensate upgrade plants and gas processing plants. Basically putting the kinds of infrastructure that more established fields have and similar to what's available in the Eagle Ford, for instance.

Great. Thanks for the comments.

Our next question comes from the line of Alex Potter of Piper Jaffrey. Your line is now open.

Thanks. Hi. I was wondering if you could comment a bit on D&S in North America, specifically with regard to LNG station construction? What are you hearing from customers, their intention to start ramping back up LNG stations or continuing wait and see mode?

We are building stations. Some have been going ahead as originally forecast. Some have had slight delays. I think we anticipate delivering most of the stations we have in backlog during 2014 or early 2015. I believe the view is more strongly that, as more liquid becomes available, you'll -- and more trucks are on the road, you'll be able to put stations into service quickly.

I think the designs are fairly well finalized. There are stations available for deployment. It's no longer a gating factor for acceptance of LNG trucking.

Okay, got it. I was wondering also on the Wuxi cost, was just wondering if those came in as planned, or if you're calling those out because there were some unexpected costs that you hadn't foreseen?

It was costs that we had perceived that wasn't in our forecast originally, and we'll have some additional start up costs in the third quarter that we have now factored into our forecast for the year.

Okay. Very good. And then, I guess, the last question, also on D&S. I was wondering if you could comment just generally speaking, at this point, how much of D&S is industrial gas-oriented? And what's your kind of expectation looking out of the next several quarters or a year in terms of growth rates?

I think we're at roughly 30% of the D&S turnover is in LNG. We had that in the presentations for our analyst day, six or eight weeks ago. And I think that at the moment we're circumspect about calling anything out on a quarter-to-quarter basis because of timing. But would expect significant growth particularly, in China in LNG related sales over the next -- in 2015 and 2016, as well as in the US, certainly growing at a faster pace than the industrial gas business. But we also do see good prospects for renewed growth in industrial gas, particularly in the US and Europe over the coming years. But I would say, that we would see moving into the 40% of sales range in the 2015, 2016 timeframe.

Okay. Very good. Thanks.

Thank you.

I am showing there are no further questions at this time, I would like to turn the call back over to Michael Biehl for any further remarks.

Okay. It's actually Sam Thomas, I'll conclude. I'd like to say thank you.

We're some headwinds associated with customer and regulatory delays in China. We remain positive about the long-term fundamental drivers of our business, especially growing LNG demand. And we're committed to meet that demand in the markets we serve.

Evidenced by recent awards, we believe a positive trend continues to unfold in small to midscale liquefaction, as the ability to get LNG to market faster is appealing to go smaller regional and local entrepreneurs. We're well-suited to meet this demand and we're excited to serve these customers with quality products, service and dependability that we deliver day in and day out. The fundamental drivers are the spread between diesel and natural gas price and the global availability of natural gas are intact. New commitments are still required across all areas of the LNG value chain and this is taking longer than we thought one year ago to play out, but we remain optimistic and we'll continue to position the Company with a flexible platform dedicated to serving our customers within beta solutions.

We continuously focus on capacity planning, project execution and operational excellence so that we can remain the industry leader in LNG and natural gas processing solutions and technology, and continue to support our industrial gas and BioMed business. We're convinced this is a strategy that will serve our customers well and provide superior performance to our investors.

Thank you, everyone, for listening today. Goodbye.

Ladies and gentlemen, thanks for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a great day.