Chart Industries Inc (GTLS) 2015 Q1 法說會逐字稿

Good morning, and welcome to the Chart Industries 2015 first-quarter earnings conference call.

(Operator Instructions)

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 a 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, May 7. 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 involves risks and uncertainties and 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 statement.

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

Thank you, Tyrone.

Good morning, everyone. I would like to thank you all for joining us today.

I'll begin by giving you a brief overview of our first-quarter results and then Sam Thomas will provide comments on current market and order trends we see in each of our business segments. I will then finish up by commenting on our outlook for the remainder of 2015.

Net income for the first quarter of 2015 was $5.2 million or $0.17 per diluted share. This included acquisition related retention costs, as well as Owatonna facility shutdown and other severance costs recorded in the quarter, were approximately $900,000 or $0.02 per diluted share.

Excluding these items, first-quarter 2015 earnings would have been $0.19 per diluted share. This compares with net income of $12 million or $0.38 per diluted share for the first quarter of 2014. First-quarter 2014 earnings would have been $0.41 per share excluding $800,000, or $0.02 per diluted share, of acquisition-related costs in that period, as well as $0.01 per diluted share, in fact, associated with Chart's convertible note.

In addition, we had a foreign currency transaction loss of $3.1 million for the first quarter of 2015, or $0.07 per diluted share, as the strength of the US dollar had a significant negative impact on our European operations. We also had foreign currency loss in the first quarter of 2014, but it was relatively small; around $100,000.

Sales for the quarter were $245.1 million, an 8% decline from the prior year quarter. This was largely due to a decline in LNG sales in our D&S business, particularly in China. The currency translation had an unfavorable impact as well.

Translation effect from the strong dollar reduced revenues about $8 million and gross profit by about $1.9 million in the first quarter of 2015 on a constant currency basis. Our gross profit for the quarter was $72.5 million, or 29.6% of sales, compared with $77.5 million or 29.1% of sales a year ago.

Overall margin dollars were down due to lower sales volume in our D&S business, while the gross margin percentage improved due to product mix and lower material costs in D&S, and improved volume and lower warranty costs in our BioMedical business.

Orders received in the first quarter totalled $219.5 million, were down sequentially from fourth-quarter 2014 adjusted orders of $251.7 million, which excludes the $33 million backlog adjustment in China during the fourth quarter of last year. We did see about $4.5 million of order cancellations in our E&C segment in the first quarter of 2015; a consequence of the current imaging environment due to lower oil prices.

In the E&C business, sales increased 1.5% to $87.5 million for the first quarter of 2015 as lower sales volume in brazed aluminum heat exchanges was more than offset by higher volume in process systems and air cool heat exchangers. Gross margins were 28.4% in the quarter, compared with 28.7% in the prior year quarter. The negative margin impacted lower brazed aluminum heat exchanger volume, was mostly offset by improved execution and project mix in process systems and air cooled heat exchangers.

In our D&S business first-quarter sales decreased 19% year over year to $105.1 million. Although industrial gas volume increased over the prior year quarter, lower LNG sales volumes globally, as well as currency impact on European results more than offset the improvement. Gross margins improved 28.6%, compared with 28.1% a year ago due to product mix and lower material costs.

In BioMedical, sales increased 4% year over year to $52.6 million. This increase was primarily due to higher sales volume in commercial oxygen generation systems. BioMedical gross profit margin improved to 33.5% in the quarter, compared with 32.6% for the same period in 2014 due to higher volume and lower warranty costs associated with respiratory therapy products.

SG&A expense for the quarter was $53.2 million, up $2.3 million compared with the same quarter a year ago. The increase was largely due to an acceleration of stock-based compensation expense associated with retirement eligible participants.

Under accounting rules, we are required to accelerate expense for employees who are retirement eligible even if they have not retired. Therefore, first-quarter SG&A expense is higher than what we'd expect for the remaining three quarters of 2015.

Income tax expense was $2.4 million for the first quarter and represented effective tax rate of 31%, compared with $5.2 million for the prior year's quarter, which was an effective tax rate of 29.7%. The increase in the effective tax rate was primarily due to an increased mix of US earnings which are taxed at a higher rate.

I will now turn the call over to Sam Thomas.

Thank you, Michael, and good morning everyone.

Our first-quarter results reflect solid execution across many of our businesses despite the challenges we are facing due to the impact of lower oil pricing and currency headwinds. We continue to take aggressive actions to reduce cost.

Over the past several months we have initiated cost reduction actions, including a headcount reduction of 8% of our global workforce with annualized savings of approximately $30 million. This includes the $20 million of annualized cost savings that we previously disclosed in our February earnings release.

We also announced the shutdown of our D&S LNG equipment manufacturing facility in Owatonna, Minnesota, due to a slowing of the LNG infrastructure build-out in North America. We are still convinced LNG is compelling as a long-term diesel fuel replacement for high horsepower applications such as truck fueling, marine, rail, mining, oil and gas and power generation.

However, consistent with our focus on reducing costs, we believe the decision to close out Owatonna is an appropriate and prudent course of action at this time. We'll continue to service our LNG equipment customers in North America from our other manufacturing facilities. We continue to closely monitor our end markets and order rates and will take additional timely action as we move through the year as necessary.

In China, despite weak sales in the first quarter, we continue to see strong order prospects for D&S LNG equipment and we expect demand to grow as the government continues to pursue it's long-standing goal of improving air quality. However, the timing of awards is proving ever more difficult to call and we are also seeing increased pricing pressure.

Overall, as expected, 2015 is going to be a challenging year for Chart. We do expect some growth in our industrial gas and BioMedical markets, and have significant LNG liquefaction and distribution opportunities that could be larger than any Chart has captured in the past.

We do face deteriorating near-term business prospects in the D&S LNG business for applications based on diesel fuel replacement and within E&C for petrochemical, natural gas processing and industrial gas applications. The headwinds associated with low oil prices and the strength of the US dollar are real. The latter impacting the value of our European results in dollar terms. In addition, increased global competition continues to compress E&C pricing and margins.

Before I move to talk specifically about each of our businesses, I would like to emphasize that, despite the short-term headwinds we are facing, we remain confident in the long-term fundamental drivers of our growth, including rising industrial production and increased demand for energy globally and natural gas specifically. We're continuing to invest for future growth, including actively pursuing potential acquisition candidates across many of our business segments.

Let me now comment on specific highlights for each of our businesses. Within Energy & Chemicals, we booked $43 million in orders during the first quarter, net of order cancellations of approximately $4.5 million, that Michael mentioned earlier. This is down sequentially from fourth-quarter 2014 orders of $71 million.

As reported last quarter, we are facing deteriorating short-term brazed aluminum heat exchanger prospects for petrochemical, natural gas processing and industrial gas applications globally. In addition, the timing of project awards is historically lumpy in the E&C segment and always a challenge to forecast.

The 100,000 gallons per day LNG liquefier we delivered to Stabilis in 2014 successfully completed its startup in the quarter and is now in production providing LNG for high horsepower application that still benefit from the lower costs and emissions that LNG affords versus diesel. Additionally, both the Noble Energy and LNG Holdings standard plant liquefiers that we have mentioned in previous calls, are scheduled to be up and running later this year.

As I alluded to earlier, we are encouraged by the continued interest and quoting activity for small-scale LNG liquefaction, and larger mid-scale multi-train liquefaction for LNG export facilities here in North America from customers who share our long-term view of the spread between oil and natural gas prices. We have received advanced engineering awards for both Venture Global LNG and Parallax Energy's Live Oak LNG project, both of which if they go ahead will employ Chart's IPSMR liquefaction process and proprietary Chart equipment.

Parallax Energy also announced their acquisition of the Louisiana LNG project earlier this week, another mid-scale export project that will employ Chart's process technology and equipment.

While remaining circumspect with regard to the impact of current oil prices on investment decisions for these projects, we are cautiously optimistic that equipment orders will be forthcoming. Perhaps as early as late 2015.

Within Distribution and Storage, we booked orders of $124 million in the first quarter, down 4% from our fourth-quarter 2014 adjusted orders of $129 million, which takes into account the $33 million backlog adjustment in China during the fourth quarter of 2014. Orders were down primarily due to lower LNG equipment demand for diesel replacement applications in light of the narrow spread between natural gas and diesel.

Global industrial gas activity is in line with expectations and should grow in 2014, based on rising industrial production and major customer forecasts. While LNG orders globally within D&S has slowed, opportunities still exist. We continue to quote significant opportunities for distribution equipment that could result in orders later this year or in 2016. This includes ISO containers for transport on railcars and ships in addition to other equipment used in the virtual pipeline.

On the topic of LNG for transport, this quarter saw the opening of Shell's first European LNG fueling station in Rotterdam, designed, manufactured, and installed by Chart D&S Europe. Chart's scope of supply includes the LNG storage tank, offloading pump skids, control system, and LNG dispensers. All supplied to Shell's exacting quality and safety standards. This follows similar openings for Shell and Travel Centers of America Truck Stop LNG stations in North America, all designed, manufactured, and commissioned by Chart.

Moving on to BioMedical. Orders of $53 million were marginally up compared to the fourth quarter of 2014. Order intake for respiratory and life sciences was as expected. Orders for commercial oxygen systems were up from the prior quarter, but still low due to project timing, which is again lumpy.

First-quarter 2015 results provided further evidence that respiratory therapy demands have stabilized. Orders and revenues have now been consistent for the last three quarters. We still expect to see some growth in the respiratory therapy business in the second half of 2015 as we start to penetrate the China market with a focus on delivering higher quality products and innovative solutions, a theme that is consistent across all areas of our BioMedical business.

Finally, we remain confident that our commercial oxygen system applications will show growth as we move through 2015 on the back of improved product lead times and an external customer financing option that we have introduced for wastewater applications.

Michael will now provide our outlook for the remainder of 2015.

Thanks, Sam.

As we originally anticipated, second-half results are expected to be stronger than the first-half. Given current business expectations, the Company is reaffirming its previously announced sales and earnings guidance.

We still expect sales for 2015 to be in a range of $1.05 billion to $1.2 billion and diluted earnings per share expected to be in a range of $1.60 to $2.10 per diluted share, on approximately 30.7 million weighted average shares outstanding. This includes the first-quarter foreign currency transaction loss of $3.1 million, but excludes any restructuring costs and potential dilution impacting from our convertible notes.

With respect to restructuring costs, we anticipate an additional $3 million in costs associated with the Owatonna facility shutdown expected be recognized in the second quarter, primarily related to the existing lease for this facility.

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

Thank you.

(Operator Instructions).

Our first question is from Tom Hayes of Northcoast Research.

Thank you. Good morning, gentlemen.

Good morning, Tom.

You provided some good commentary on the pricing trends you are seeing in E&C. I was just wondering if you could a little bit of similar color what you are seeing on the D&S side?

It's a similar situation. We've got everyone chasing diminished order prospects. And as you would expect, in that situation pricing is competitive.

Okay. And then I'm just wondering if there is any update you could provide on the PetroChina shipment outlook for the orders?

Not a lot. PetroChina has been taking equipment and it has indicated they expect to see more, but there is still a fair amount of turmoil and uncertainty in the Chinese market and for the nationally owned companies in particular.

Okay. Thank you.

Thank you. Our next question is from Walter Liptak of Global Hunter. Your line is open.

Thanks. I wanted to ask one on the Venture Global and other larger projects. I wonder if you could help us understand the size of those market opportunities and what are some of the factors that you're thinking about in terms of timing? I think you mentioned late this year, or as early as late this year, you might see some orders come through.

Yes, so we're working on advanced engineering contracts. Each of those companies has announced the size of their potential projects in terms of millions of tonne per annum output. They are larger because it is our process technology and we're providing a complete package.

The opportunities are larger than others we have historically had. Could be as much as two to three times as big as we reported in previous LNG awards. In terms of timing and to what the ultimate size of those orders are, that's dependent on the final investment decisions and for them obtaining contracts for the output of those plants. So there is not much point in speculating further as to timing of awards beyond what's been announced.

Okay. Great. Thank you.

Next question is from Noah Kaye of Northland Capital. Your line is open.

Yes. Thank you. You talked about quotations for transport on railcars. As regulatory guidelines for LNG and railcar transport evolve, what's your view on when that market starts to come online, perhaps in North America specifically, and how big do you think that can be for you?

It's very difficult to forecast timing or the ultimate market size. There's a wide range of possibilities from 10% penetration for locomotive fueling over a two, three, four-year time period with primarily being prototype or beta type units going into service to ultimately replacing all of the rail fleet with LNG-powered units. But based on the long life of the equipment and the conservative nature of the rail industry in making that kind of move, I think for significant penetration you're talking about time periods that are in the 8 to 15-year time period.

Sure. Sure. And then also you alluded to the increased global competition. I think your comments were focused on E&C. So we could just stay there. What in your mind would be some catalysts that can remove that overhang and open up more market opportunities for folks? What are you seeing in terms of the industry's trajectory at this point?

That industry has traditionally been capital spending or business cycle dependent. And increased demand, which can be driven by either higher energy prices or a growing global economy will create additional demand for products. Pricing levels in the industry tend to be driven by utilization of capacity.

Okay. Thanks. And then maybe we could be a little bit more precise on what the headcount and Owatonna reduction will mean for your capacity. Once that facility is closed, where would you put your capacity utilization at for your LNG D&S production? How much run room would you have if the market starts to come back?

Significant. With respect to LNG Distribution and Storage related capacity we will be at less than 50% of our available capacity.

Okay. That's very helpful. Thank you so much.

Your next question is from Chase Jacobson from William Blair. Your line is open.

Good morning. Looking at the guidance here, understanding that the first quarter is seasonally weak and there was some currency headwinds, it still assumes a pretty good pickup in sales as well as margin over the next three quarters. And, Sam, from your comments, there's clearly a good bit of uncertainty in the markets, whether it's in E&C or D&S. So maybe if you could just talk to the confidence level in your guidance?

Our guidance is based on bottom-up forecasts in all of our businesses, which we go through a formal process on a quarterly basis and we update on a monthly basis. The first quarter was weak. I think that's evidenced by reports from the energy industry as well as the first quarter reports from the industrial gas industry.

But all of those markets we either have confirmed delivery schedules that appear significantly better in the second half -- excuse me, in the second quarter than the first quarter, but also better in the second half. And then at a macro level there appears to be some stabilization of oil prices and reducing uncertainty, I believe will improve demand and order intake. And I remain convinced that that's a reasonable assumption to make.

Okay. And then on the capital allocation, obviously the markets didn't play out the way many of us expected. But there were some big investments in North American LNG, in China.

So as you go forward here, can you just -- is Chart changing the way that it looks at capital allocation, whether from an internal investment perspective or from an acquisition perspective based on the events over the last few years?

The commitments we made to increase capacity were based on a long-term view of the demand for LNG-related equipment. This is a cyclic pause which we still believe the industry will recover from and demand will grow and in the fullness of time I'm confident that those will be judged as very effective investments in our capacity.

Our past experience has been that when we've had capacity available and the ability to respond quickly to upturns in demand, the Company is rewarded very well for having that. And I still believe that to be the case for the future. In terms of in the current environment what kind of investment decisions are we making, in view of the fact that we have significantly added to our capacity and feel well prepared for an upturn, we don't see the need to make continued capacity expansion, although we continue to look for investment opportunities in capital expenditure for production equipment that will enable us to lower our costs and/or improve our throughput time. So it won't go to zero. We remain bullish about the industries we're in.

You also asked about acquisition opportunities. In cyclic downturns for our industries we have been rewarded in the past for having the dry powder available to make acquisitions when other people are disheartened with the prospects for business, again with the view that through an upturn we can be rewarded for making those kinds of investments.

We'll continue to be cautious and somewhat conservative in making that type of acquisition. But we also believe that with diminished trading prospects there are improved prospects for making good acquisitions.

Okay. Lastly, Michael, can you tell us what the amount of the stock-based comp associated with retirements was in the quarter?

About $3.5 million in total.

Okay. Thanks a lot.

Our next question is from Eric Stine of Craig-Hallum. Your line is open.

Hi, Sam. Hi, Michael.

Good morning, Eric.

Maybe just touching on orders. I know on last call, late February, you indicated that you didn't feel like you had really seen the full impact yet. And so just wondering can you talk about maybe some of your discussions with customers? What you saw in March, and maybe an early read on orders in the second quarter?

I stand by the comment I made in February that we've seen more negative news since our February call. However, I think it's -- I would deem those comments from customers more on the fact of we're not quite sure what happened in the first quarter, but it was ugly.

But we don't see signs of customers throwing in the towel and saying we're closing up shop for the rest of the year. So we expect to see prospects improve. And I think generally that's holding out is what we're seeing.

Okay. So you are seeing some positive trends here in April?

Yes. Nothing that's causing dancing in the streets or dancing in our hallways, but yes.

Okay. Understood. Thanks for that color.

Maybe then just turning to the balance sheet, it looks like you had some working capital that impacted the first quarter. Looking back historically, it didn't happen in 2014, but in typical first quarters, that seems like it's the case. Maybe just some clarity there and expectations going forward?

I would say that the first quarter order rates and customer delivery uptake, particularly with regard to China, are the major causes of the increase in first quarter working capital. In other words, we were building to expected delivery schedules or order intake rates, both of which were disappointing in the first quarter. Promises that that's going to improve in the second quarter and the second half of the year, but we'll see.

Okay. Maybe last one for me. Just the floating LNG, you've been involved in the past, and you did the first [Global] first ship conversion. I know that they've moved forward on a second and potentially more. Just thoughts on your potential involvement there? Thanks a lot.

We still remain positive about it. For all of the LNG projects there is a period of reflection as significant new LNG is coming online and offtake customers have been slow to make commitments in an environment where spot prices have been dropping. I think that long-term the price outlook is such that these projects will go ahead. But the near-term timing of them is difficult to predict based on that uncertainty.

Okay. Thank you.

Our next question is from Alex Potter of Piper Jaffray. Your line is open.

Thank you. I was wondering if you could comment a bit specifically on China D&S orders maybe over the last month or so. Obviously, that wouldn't have been reflected in Q1. But was just wondering what sort of impact that natural gas price cut domestically had in China on, I guess, A, your existing order rights now and your expected order rates over the next couple of quarters?

Improved but muted against expectations, I guess would be the best characterization, Alex. We've got significant quotation activity, potential orders, and orders coming through. But I think that the view is that orders and delivery will be ramped and delivery requests will be ramping up in the second and third quarter.

Last year order activity and shipment activity were heavily second-half weighted. And there's an anticipation that we may be seeing a repeat of that process. So I guess the response is it hasn't been as strong as we'd hoped. There is apparently good traction for LNG replacement on the coastal areas where you have got low contract prices for imported LNG and even lower spot market prices. Less traction for liquefiers that are based on pipelines where there hasn't been full adjustment of pipeline gas prices down to make LNG attractive for the liquefiers.

Okay. Fair enough. Thanks very much for that.

I was wondering also, I guess maybe, a little bit more color on ForEx. You have kept the guidance range constant, but presumably your view on ForEx has changed over the last month -- or last quarter, excuse me. So I'm wondering if it would be possible to strip out the ForEx impact on guidance? What would guidance have been had there been no change in the ForEx outlook, if that's possible to do?

Well, the $3.1 million, the transaction, the foreign currency transaction loss is in that guidance. I mean, I don't think we would have changed our guidance one way or another. We don't forecast forward in terms of foreign currency losses or gains.

We did lower expectation on the conversion rate for the Euro down to -- I think it was $1.13 down to $1.06 in the ongoing forecast expecting some further turbulence there. So some of that is factored into the forecast. But again, it's unlikely that we would have raised our forecast without that.

Right. Okay. And then one last question on maybe the trajectory of E&C gross margins. Obviously, a lot of commentary there about capacity underutilization across the supply chain and ASP pressure. You did see some amount of gross margin degradation on a sequential basis, but not a ton. I'm wondering what you would think on that line item going forward into the next couple of quarters?

The expectation is as backlog is worked off over the year, that it will decline. It was in the high 20%s first quarter. I would expect it to be in that mid 20% range in the second quarter and it could be lower than that over the remainder of the year. As low as in the 20% range just based upon order levels and backlog being worked off.

Right.

It does not include -- there is nothing in our forecast related to any of these large projects for Venture Global or Parallax that we built in. Make that clear.

Right. Yes. That's kind of what I was driving at. And I guess one maybe -- sneak this one in there, too. Is there any potential for some of these rush orders? Every once in a while you see those rush orders come through and juice the gross margin in a quarter. That could potentially happen at some point?

Yes. Because of the capacity that we have there is good opportunities for that over the remainder of the year.

Okay. Thanks a lot.

Thank you.

Our next question is from Rob Brown of Lake Street Capital. Your line is open.

Good morning. I just wanted to touch on the E&C order cancellation, I guess. How much of your backlog is at risk of potential order cancellation and is that something you feel like is worked through or is that something we could see more of?

Currently, I would think that the impact of any additional cancellations would be minor. That's always challenging. But typically as we move into our backlog the customer's skin in the game is more significant.

Having said that, I've been surprised in the past with customers canceling projects that were fairly far along. It doesn't -- it typically, because of contractual arrangements, doesn't have a significant negative financial impact on us. So, I guess the best answer to it is unknown, although I don't think it's dramatic. It hasn't historically been dramatic.

No, I was going to say I think the most we have seen in a down cycle in prior years is about $20 million. Right now I don't expect it to be at that level. But it's hard to say.

Okay. Thank you. And then the same question on the margins with the D&S segment. How do you see that margin playing out sequentially?

Again, they are in the high 20%s. I would expect them to maybe notch down 1%, 1.5% over the remainder of the year based upon the mix. The product mix going forward. And again that could change depending upon whether we have more in China or more here in the US or Europe. That pushes it around somewhat.

Okay. Great. Thank you. I will turn it over.

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

Thank you. I apologize. You may have literally just answered this question and I didn't hear it. I was going to ask backlog margins in D&S. Was that the 1 to 1.5 points you just mentioned?

Yes. In terms of the margins for the year? Yes.

Yes. And that was specific to D&S margins?

Yes. Correct.

Okay.

You are getting predictable, Greg. We can anticipate your question.

Yes, that's right. So you guys had talked about $30 million in annualized cost savings. How should we think of that in terms of, is that a reduction to the operating expense structure as it existed, call it at the beginning of the year, or is that the absence of increases to the cost structure that might have been planned previously? I guess, trying get at the what does G&A look like in the context of a $30 million reduction?

It's mostly headcount reduction. I would say 90%, 95% of it is headcount reduction. Keep in mind that $30 million is on an annualized basis. So with restructuring costs and severance and things like that, it lowers the impact in the current year. It also gets offset by lower capacity and throughput.

Those are as opposed to the run rates in the fourth quarter of 2014, Greg.

Okay. So that truly is $30 million less than the run rate. It's not the absence of changing a plan for future increases. Okay.

Right.

Okay. Thank you. And from an order intake standpoint can you handicap -- if we look towards the bottom end of your revenue guidance range, toward the top end of your revenue guidance range, what type of order intake maybe needs to occur June through December on either end of that?

Very challenging to answer intelligently.

I mean, it would mean an increase, obviously, in the second quarter from where we're currently at in the first quarter. And with E&C being so lumpy, it could be a third quarter push. It is difficult to answer. It clearly -- our expectation would be that orders will increase as we go through the year.

Okay. And then the last question, Sam, and this would be maybe even more difficult to answer, but as you look at the broader LNG market are there -- what is the behavior of customers to enter into long-term take-or-pay contracts so that these projects can secure project financing? Is there a way to -- for us to intelligently handicap how these massive opportunities late this year fit into that puzzle and then help us inform the likelihood of those moving forward?

I think a number of the comments that came out of the SERA conference in Houston this past week are probably illustrative. The kinds of comments we get from end users, the investment community, and from these project developers, are that lowered spot prices, particularly in Asia, mean that Asian customers, utilities or national energy companies, are being hard-nosed in negotiating and not indicating enormous need to sign contracts immediately.

The contracts -- the projects that we think have the greatest likelihood of going forward in the near term are those that have been focused on supply to western European utilities tying to achieve diversity of energy supply.

Okay.

And so, in other words, a utility perspective in western Europe, a stated goal is to have contracts which enable them to get supply based on the relative output of various parts of the world for introducing supply diversity and reducing their overall risk.

Okay.

And that's the current most attractive market that Gulf Coast or Atlantic Basin projects see as their best opportunity over the next 12 months.

Okay. Okay. Thank you.

Thank you.

Our next question is from Rob Norfleet of Alembic Global. Your line open.

Hi, guys. Thanks so much for taking our call today. This is actually Nick Chen filling in for Rob Norfleet on the call. Our question, just pertaining to the last several quarters, you guys had some discussion just about your IP in China and just trying to protect that. Can you give us any updates in that area?

No changes. It's a challenging area. China is a hyper-competitive market. But we don't see any changes in our ability to protect our IP significantly over the last few quarters. It's a continuous challenge and battle, but we think we're well equipped to fight it.

Okay. Great. And then, we touched on it a little earlier in the call from more of a surface level. I was wondering in terms of FLNG projects are you tracking the potential of the opportunity in that market?

We are. Yes. In our project pipeline, although I'll admit I'm not close enough to it to comment in specifics as to what the current projects in the pipeline are. I know there are a number of them. But I'm not close enough at the moment to give you an idea of how far away each of them are.

That's great. Thanks so much, guys.

Next question is from Pavel Molchanov of Raymond James. Your line is open.

Hey, guys. Going back to the two LNG export facilities that you have the feed contracts with, if you were to get a cold box order from either one at the end of 2015, which you said might be a possibility, what would the revenue recognition for that look like? In other words, how -- you know, would it be like a two-year cycle? What's the timetable?

Normally it would be an 18 to 30-month cycle. Both of these facilities are multiple trains. So the delivery of cold boxes for them would be spread over that time period. And revenue recognition typically for projects of that size doesn't start until two to three months after receipt of a firm purchase order.

Got it.

But they have project timeline going out to 2018 or in some cases into 2019.

Okay. That's helpful. And then on the shutdown of Owatonna that you alluded to, was there something specific in the last three months that got you over the hump to actually pulling the trigger on that shutdown? I mean, clearly the domestic LNG opportunity has been weak for a while. But what happened that got you to make that decision?

There's two aspects to it. Since we had added the Owatonna facility, which was a leased facility, we had also increased capacity at our fully owned facility in New Prague, 30 miles away.

And then in the fourth quarter and early first quarter with the continued fall of oil prices that slowed activity down for -- and also the reduction in drilling slowed down the supply of diesel fuel replacement equipment for oil production, is really the deciding factor. So we had developed the ability to produce the products produced in Owatonna at other sites, and also the near-term, and I'll say through 2015, prospects for equipment to the heavy-duty diesel fuel replacement market, particularly for oil and gas production look more [up].

Got it. Appreciate the color, guys. Thank you.

Our next question is from Jeff Osborne of Cowen and Company. Your line is open.

Great. Good morning. I just had two quick questions. One is on the Shell Rotterdam facility. What is the pipeline for additional D&S applications in Europe? And is it all trucking related or is there any other end market that's driving that?

No. Shell and others continue to be interested in building out the infrastructure in Europe for the trucking market. Perhaps one where there is greater activity and greater potential in the near-term is for the marine market.

Great. And then -- okay. And then the last question I had was just, you talked about the D&S weakness in China. I was wondering if you could just touch on the low pressure E&C tide, the [Wooziak] position that you made some time ago. Is there any activity there or is that in a weaker position than even the D&S side?

There is activity. There is continuing customer approvals and work going through there. But the demand for their products is very weak right now.

There is very little LNG liquefaction activity going on because there is a number of plants that have been -- there has been a large slug of new capacity for liquefaction in China completed over the last year, and at current pipeline gas prices it's underutilized. So not many prospects for orders there. With lower industrial activity there is relatively little air separation progress going on right now or orders going on.

Understand. Appreciate the comments. Thank you.

Thank you.

(Operator Instructions)

Next question is from Anjali Voria of Thompson Research. Your line is open.

Good morning. I think you guys have touched a lot on the natural gas side. Within D&S I was wondering if you could speak to your industrial gas categories? I think you mentioned it was up year over year. I assume that growth rate decelerated from Q4. I was wondering if you could provide an indication of what that deceleration looked like or where growth rates were in Q4 versus Q1 and what your customers are saying now that we're in Q2?

I think it's -- perhaps I'll cover it across the three regions. In North America, we've seen through the second half of last year improving industrial gas activity. I would call the first quarter a plateauing of that demand. It continued strong in packaged gases. Less so in larger bulk tanks.

But customers -- and you can see it reflected in the first quarter reports of the industrial gas companies saying that activity was down, that generally everybody was impacted more by the pullback in energy-related capital expenditure than they had anticipated. General industrial applications, I would say going forward, our customers continue to be positive about increasing activity levels or a continuation of the activity levels.

For Europe, we did see a significant slowdown in activity at the end of the first quarter in March, whereas, we seem to have been building momentum and we have seen challenging price competition in Europe, although the business has continued to perform well. In China, there was definitely the view that first quarter activity levels were low. That there was a pullback in activity across the board.

It's sometimes very difficult to read in China in the first quarter because of Chinese New Year and Chinese New Year was later this year, and that tends to just reduce activity for a longer period of time. But I would say, overall US positive and continued positive, although a bit muted, as you see GDP forecasts come down for the rest of the year. That reads through into expected demand.

China uncertain, although still believe that the government will be able to stimulate things to have a better second half than first quarter. And Europe should be positive, but that wasn't evidenced in orders.

Just for clarification, do you perceive there to be a lag of -- when you think about the slowdown of some customers? Do you perceive there to be a lag in that -- when it's actually reflected in your sales, or do you think you immediately see that slowing in your sales based on what your customers have said?

No definitive answers because we've got significantly different lead times for our products. The products that have the shortest lead times we generally take to be the leading indicators. Those are generally positive. It's tough to predict on some of the longer lead time products and, hence, for our longer lead time products our customers' timelines are also longer. So it's difficult to read.

And just one last question. Could you clarify on the cost savings announcement? Last quarter I think it was $20 million. Now I think you ramped that up to $30 million. Did you reach the full, what would have been $5 million, run rate in Q1 in terms of cost savings, or was it perhaps a little bit more than that or less?

I would suspect not, because many of those actions -- some of those actions occurred in December. But a number of them occurred in February or March. So no, I would not anticipate that a full $5 million of savings was achieved in the first quarter.

Okay. Thank you.

Thank you. This ends the Q&A portion of today's conference. Let's turn the call over to Sam Thomas for any closing remarks.

Thank you. Well, as we have spoken about throughout this call and also last quarter, 2015 is a challenging year. We expect to see some growth in our D&S industrial gas and BioMedical markets, but expect that growth to be realized in the second half of the year rather than the first.

In the meantime we'll continue to focus on improving operations and aggressive cost cutting while serving our customers at the same high standards they've come to expect from Chart. We've demonstrated our ability to successfully manage and execute through cyclic downturns in the past and we'll do so again. We will also continue to pursue our long-term strategic growth initiatives, including opportunistic acquisitions and will be ready and able to respond when the cycle turns and growth returns, which it will.

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

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.