Apr 25, 2013
Executives
Michael Biehl - EVP, CFO and Treasurer Sam Thomas - Chairman, President, and CEO
Analysts
Eric Stine - Craig-Hallum James West - Barclays Capital Tom Hayes - Thompson Research Group Rob Brown - Lake Street Capital Martin Malloy - Johnson Rice Cullen Roche - Northland Capital Market Greg McKinley - Dougherty Bill Priebe - Geneva Capital Management Jeff Osborne - Stifel Nicolaus Randy Bhatia - Capital One Southcoast Alex Potter - Piper Jaffray Lee Colin - Hermann Robert Norfleet - BB&T Capital Markets
Operator
Good morning and welcome to the Chart Industries Inc. 2013 First Quarter Conference Call.
All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.
As a reminder, today’s call is being recorded. You should have already received the company’s earnings release that was issued earlier this morning.
If you have not received the release, you may access it by visiting Chart’s website at www.chartindustries.com. A telephone replay of today’s broadcast will be available following the conclusion of the call until Friday, May 3rd.
The replay information is contained in the company’s earnings release. Before we begin, the company would like me to remind you that statements made during this call that are not historical in fact are forward-looking statements.
Forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied in 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 at the latest filings with the SEC. These filings are available through the Investor Relations section of the company’s website or through the SEC website, www.sec.gov.
The company undertakes no obligations 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.
Michael Biehl
Thank you, Operator. Good morning, everyone.
I would like to thank you all for joining us today. I will begin by giving you a brief overview of our first quarter results and Sam Thomas, will provide comments on current market and order trends we see in each of our business segments.
I will finish up by commenting on our outlook for remainder of 2013. Reported net income for the first quarter of 2013 of $15.5 million or $0.51 per diluted share, this included restructuring cost of $1.2 million or $0.03 per diluted share largely associated with the company’s acquisition of AirSep in our BioMedical segment.
Earnings per share for the first quarter of 2013 would have been $0.54 per diluted share excluding these items. This compares to first quarter 2012 net income of $14.1 million or $0.47 per diluted share.
The prior year quarter earnings would have been $0.48 per share excluding $0.5 million of the acquisition related earn out adjustments. Sales for the quarter were $274 million and represented an increase of 27% compared to net sales of $216 million a year ago.
The improvement is associated with strong end market trends in our energy and chemicals or E&C and distribution and storage or D&S segments, which continues with the order award we announced today. AirSep contributed approximately $27 million in sales in the first quarter.
Our gross profit for the quarter was $79.5 million or 29% of sales compared with $67.6 million or 31.3% of sales a year ago. Overall margins were down due to execution issues on two projects one in E&C and another in D&S resulted in higher than forecasted cost of 4.3 million or $0.10 per diluted share.
With respect to the E&C business sales increase 17% to $80.9 million in the first quarter due to increased revenue on significant systems and brazed aluminum heat exchanger projects coming out of backlog. Gross margins were 25.9% compared to 31.5% in the prior year quarter.
Gross margins were lower due to project mix some higher cost of one project due to labor inefficiencies and projects scope changes which impacted the E&C margins about 4% in the quarter. We are working on a very compressed schedule which resulted in higher overtime and labor inefficiencies to meet customer delivery requirements.
This project was shippped last week and no further and favorable impact is expected in the second quarter; however, there is a possibility to recover some of the cost associated with the project scope changes on this project. The opposite happened last year during the first quarter of 2012 were margins improved about 3.5% due to completion of projects including favorable reversal of unused project reserves.
In D&S, first quarter sales increased 23% year-over-year to 128.7 million driven by continued growth in LNG equipment shipments, especially in Asia. Gross margins for D&S improved to 28.4% compared with 28% a year ago to improve product mix and volume.
Relative to our forecast though, our margins were lower than expected due to higher cost associated with one project in D&S. This project had a number of scope changes due to customer design changes and regulatory standards that were being developed at the time supplement was being manufactured.
This resulted in about 1.2 million of higher cost than we had estimated in our initial forecast for 2013. This project is nearing completion.
It is now expected to impact second quarter margins. In our BioMedical business, sales increased 52% to 64 million in the first quarter of 2013, compared with 42 million for the same quarter in the prior year.
The increase is due to AirSep, which had a 27 million in revenues in the quarter. Additional revenue from AirSep offset lower overall sales in respiratory therapy as a result of the continued weakness in Europe and the delay in the Medicare competitive bidding process in the U.S.
BioMedical gross profit margin decreased to 34.4% in the quarter compared with 38.9% in the same period in 2012. The decrease is primarily due to changes in product mix, lower margin oxygen concentrators representing a much larger share of sales on the AirSep acquisition.
SG&A expenses for the quarter were 47.2 million, up 6.6 million from the same quarter a year ago. The increase is largely due to the AirSep acquisition in addition to an increased employee related cost, and external commissions as we pursue LNG related growth opportunities both in the U.S.
and Asia. Also included in SG&A was the 1.2 million of restructuring cost, associated with the acquisition of AirSep in our BioMedical segment.
SG&A as a percentage of sales continued to decline to 17.2% compared to 18.8% in the prior year quarter and is expected to continue to decline as a percentage of sales in 2013. Net interest expense was 4 million for the first quarter which included 2.4 million of non-cash accretion expense associated with the company’s 2% seven year convertible notes.
Therefore cash interest expense for the first quarter was just 1.6 million. Net cash interest expense from the first quarter of 2012 was 1.8 million.
Income tax expense was 6.6 million for the first quarter and represented an effective tax rate of 29% which was the same as in the prior year quarter. And I will turn the call to Sam Thomas.
Sam Thomas
Thank you, Michael and good morning everyone. On an overall basis we struggled with the execution on a few projects that Michael mentioned, this quarter.
We believe these project issues are behind us and we remain very optimistic about our opportunities going forward. The order from PetroChina we announced today continues to validate our status as the greatest supplier of producing critical equipment for the liquefaction, distribution, storage in use of LNG.
The PetroChina order in excess of 45 million follows another order for 40 million that was included in the fourth quarter of 2012 orders. We expect to see continual acceleration of LNG infrastructure build out in China.
The recent North American LNG liquefaction announcements made by several companies including Novell Energy [ph]stabilized in Shell further support. The LNG infrastructure build out that is underway.
We believe the availability of LNG is one of the key determinants in the conversion of using LNG as a fuel, this market will move aggressively when there are liquefiers operating and merchant liquid more broadly available for distribution. For example, in particular the Shell announcement with the Great Lakes and the Gulf Coast will be significant five additions and increase dramatically the availability of LNG.
The recent announcement from UPS accelerating the growth of its alternative vehicle fleet with plans of purchasing approximately 700 LNG vehicles, have to build four refueling stations by the end of 2014 and additional support to the LNG build out. Shell and TravelCenters of America have finalized their agreement to develop a U.S.
nationwide network of LNG fueling centers for heavy duty road transport customer providing another example of the commitment to LNG infrastructure Let me comment now on the order levels in the first quarter and highlights from each of our business segment. Our energy and chemical business booked $39 million of orders in the first quarter down sequentially but our coding activity for LNG liquefiers and petrochemical applications remains strong, with a number of those projects expected to go forward over the next couple of quarters.
I also remind everyone at the time we awarded in our E&C business is historically volatile due the project site that is not unusual to see order intake change significantly quarter to quarter. As I indicated, there were a number of recent LNG liquefier announcements which represent potential future order opportunities for E&C for example, Stabilis announced their plan to build five North American LNG liquefaction facilities to serve the high horse power oil field marine and rail fuel markets.
It contracted with us to perform the FEED study which ultimately contains manage in-charge’s new range of standard LNG plant offerings for small scale gas monetization. We continue to see softness and a gap compression market in the U.S.
which has impacted our air cooled heat exchanger business. There are signs; early in the second quarter that gas compression is coming back.
We continue to make progress on large projects already backed off which continues to drive rapid growth. Our brazed aluminum in heat exchanger capacity expansion project is on schedule and we expect the first quarter 2014 ramp up.
We started to book orders again to this new capacity in the second quarter. With respect to the D&S, if you exclude the large 40 million PetroChina order included in the fourth quarter of 2012, first quarter orders of a $133 million represent 20% sequential growth over adjusted orders for the fourth quarter of 2012.
Orders remain especially strong in Asia and our European orders were encouraging and the strongest we have seen in quite some time including engineered tanks; mobile equipment in LNG applications. The new PetroChina order announced today an excessive 45 million and will be included in the company's second quarter 2013 orders and backlog; these words highlight a continued rapid LNG infrastructure build-out that has been occurring in China.
PetroChina award includes fixed stations and affordable self-contained fuel stations, storage tanks and trailers for LNG service. PetroChina has been extremely aggressive in developing the LNG market and their constructive build out in China continues to ramp up its infant choices are in full productions.
LNG’s liquefaction capacity comes online. We believe our success in capturing large orders is due to our experience in delivering quality solutions through the available capacity across the entire value chain.
In North America, investments analogy related application issued benefits from the recent liquefier announcements and accommodates 12-liter LNG powered truck engine recently put in production and schedule for a full production launch in August. The pure economics of switching to LNG, cleaner, cheaper and domestic energy source will continue to encourage market development.
Our recent capacity additions and our plans for further expansion in 2013 will ensure that the Chart remains well -positioned to deliver on these opportunities. A long term secular growth story for LNG remains intact.
Heavy duty truck fuel and oil and gas application are the near term opportunity for Chart. We will also expect strong demand within the next several years for LNG storage and end use equipment in marine, rail and in industrial applications.
We are creating infrastructure today to support that future growth and our getting request to participate in a number of current marine and rail LNG applications, demonstrating the Chart continues to be recognized as an industry leader. We expect to remain that leader in the industry appropriately.
In our biomedical segment, orders of 72 million in the first quarter represent 11% sequential growth. Orders for commercial on site oxygen generation, for industrial applications acquired in the AirSep acquisition, lately increased and represent an exciting growth opportunity for Chart.
Orders for prior biological equipments were also strong particularly in Asia. Macroeconomic concerns in Europe and delays in the Medicare competitive bidding continue to impact our biomedical respiratory business and we do not expect this business to begin to recover --we do expect this business to begin to recover late in 2013, as the underlying need for our equipment has not diminished.
We continue to integrate the AirSep acquisition and focus on improving operations and exploring cost reduction opportunities. We were encouraged by the margin improvement we had in air business in the first quarter compared to the fourth quarter of 2012 and will continue to improve our operating performance.
Michael will now provide you with our outlook for 2013.
Michael Biehl
Thanks, Sam. As we have seen in prior years our first quarters as usually are slowest on sales on earnings and we expect this year we’ll follow a similar pattern of growth in the remaining quarters.
In addition orders and shipping trends are progressing as expected in 2013 with significant growth in LNG opportunities. We are reiterating our 2013 guidance with sales expected to be in the range of 1.2 to 1.3 billion.
Full year earnings per share of 2013 are still expected to be in the range of 290 to 330 per diluted share or approximately $30.5 million weighted average shares outstanding. Our weighted average shares projection excludes any potential future dilution impact associated with the company's convertible notes and related derivative securities.
Included in our 2013 earnings are approximately $0.10 per diluted share for anticipated restructuring charges associated with the AirSep acquisition. Excluding these charges, earnings would be expected to be fall in the range of $3 to $3.40 per share.
Let me briefly summarize the accounting impact of the company’s convertible notes and the associated hedges and movements in our earnings per share calculation. Our convertible notes have a dilutive effect on earnings per share when the average market price of our common stock during the period exceeds the convertible notes conversion price of $69.3.
The convertible note hedges were purchased to reduce the potential dilution upon conversion, however for accounting purpose the effect of the hedges are excluded from the competition or diluted earnings per share were since ignored as they are effect is anti-dilutive prior to conversion. If the convertible notes were actually converted, the note hedges would completely offset the shares issued such that the net shares outstanding would not increase up to $84.96 price per share when the protection of our net hedge ends.
Our average common stock market price was $71.13 for the first quarter, thus we are required to include $107,000 additional shares related to the notes in our diluted earnings per share calculation which had less than a penny per share impact this quarter. What if our stock trades higher?
Will start to see more of an impact on diluted earnings per share for example an $80 average share price would see about $500,000 additional shares included in the diluted share account, however in reality at an $80 share price there would be no dilution at the time of actual conversion as a result of the hedges we have in place. Now I would like to open it up for questions, operator please provide the instructions to participations to be able to ask questions.
Operator
(Operator instructions). Our first question comes from the line of Eric Stine with Craig-Hallum.
Please go ahead your line is now open.
Eric Stine - Craig-Hallum
This one I want to touch on the or start with the PetroChina order, congratulation on that. I am just wondering, how we should think about timing, I mean I guess that and also the $40 million order from the fourth quarter, is this going to be waited towards 2013 or is it into 2014 as well?
Sam Thomas
The fourth quarter $40 million order will be fully delivered by July of this year, but new order -- a large part of it will be delivered in 2013 with some spillover until I think into February of next year but essentially there are certainly short lead times and we expect to see additional orders in the future.
Eric Stine - Craig-Hallum
Got it and I guess that leads to my next question I mean we know China is still very much in ramp up mode but maybe specifically to what you are seeing from PetroChina would you put them in the same campus as that and is this something seeing large orders of this magnitude in D&S is there something there to become more than norm?
Sam Thomas
Well in China the estimate is that there will be 1500 LNG stations built in 2013, that was a PetroChina estimate for the whole market their forecasting 2014 will be 3,000 stations and continuing growth into 2015. We will have built in 2013 approximately between 250 and 300 of those stations.
So, roughly 20% market share, I think that is the opportunity for us to increase our market share going forward but it is competitive.
Eric Stine - Craig-Hallum
As far as those projects I mean just talk about the competitive environment in terms of pricing but also kind of what gives you or what just makes you competitive in that market, is it safety and anything along those lines?
Sam Thomas
Our differentiators have been quality, safety, reliability and professionalism in all the installation. We have developed a pretty impressive team in China whether it is shop built stations that can be delivered and set up in two or three days or fixed stations which going forward a larger and larger percentage will be fixed stations.
The stations we have built are basically the show pieces for PetroChina which the competitors are benchmarking off of and trying to duplicate the quality of our installations and their reliability.
Eric Stine - Craig-Hallum
Maybe if I can just sneak in one more, could you just talked about the opportunity you are seeing in marine and rail I know versus maybe a year ago those have noticeably accelerated so just thoughts on what you are seeing and potential timing when it starts to impact you? Thanks.
Sam Thomas
The interest and commitment on both rail, well let’s talk about them separately. On rail virtually all the major rail roads are actively studying or embarking on pilot projects and we know that in 2013, ’14 there will be a number of locomotives running with LNG tanker cars.
Whether 2014 sees 5 or 30 of those in operation is yet unknown, occasionally the time schedules and ambitions of some of the players involved are more aggressive than their actual ability to move forward, but as we see heavy-duty trucking make a significant move to LNG. The rails have very little opportunity to avoid also moving to LNG because the rails cost advantage over trucking is that they have less flexibility but they have lower fuel cost.
If you significantly lower truck transportation fuel cost you threaten a significant amount of rail freight. So, my own view is that rail will go forward strongly, the level of ramp up once you get out, pass all of the test and trial periods which have to be through 2014 perhaps into 2015.
The rate of conversion will be determined to a certain extent by whether you run to all fuel engines or strictly 100% natural gas engines and what the pricing comes in at doing conversions from existing diesel power locomotives to national gas whether it’s engine rebuild or engine replacements which is still up in the air, but I think I am fairly confident, it’s going to happen. The period three to four years out in terms of how rapidly that transformation takes place is a bit fuzzy right now, but it appears to have a high likely sort of happening.
In marine market, we are seeing acceleration of interest. We have delivered the first U.S.
built; ABS, coast guard certified marine fuel tanks for work boat. There will be more in the coming months.
We see the interest level from marine operators to be very high and because of the air pollution, our machines requirements, LNG appears to be the most cost effective and attractive solution. Again over the next three to four years it’s difficult to project how fast things will ramp up, partially because of this engine replacement, engine refurbishment issue, but it looks extremely promising and we see the marine market accelerating and getting a lot more interest in China and getting fairly dramatic levels of interest in Europe.
Operator
Thank you. Our next question will come from the line of James West with Barclays.
Please go ahead, your line is now open.
James West - Barclays Capital
Sam, what market do you think over the next 12 to 24 months grows the fastest from here in China or here in North American business?
Sam Thomas
From a sales perspective China because the orders are in hand and basically we’ve about -- that market growing quite rapidly. I talked about 1500 fuel stations in 2013, 3000 forecast in 2014.
In terms of LNG vehicle tanks or for newly constructed buses and trucks, the estimates for China for this year are on the order of 150,000 to 200,000 vehicles and next year double of that. We’re seeing an addition to marine; we’re seeing LNG vehicle or LNG fuel systems being incorporated into construction equipment and mining equipment.
Probably the most telling aspect with respect to China is that air quality has moved to the forefront of concerns of the Chinese people and the Chinese government, and LNG is seen as the most effective way for them to address motor transportation as well as using natural gas for power gen. The folks from PetroChina explained this past week that they don't expect to see new coal fire power plants built in any of the coastal cities, they don't expect to see significant new coal gasification projects allowed anywhere that will affect the air quality of the coastal cities, it's really full blast ahead on LNG and natural gas power plants.
James West - Barclays Capital
How big is China of your sales today?
Michael Biehl
They'll be about 165 million this year, now some of that is industrial gas, but the growth is coming from LNG—industrial gas…
James West - Barclays Capital
Okay, okay, and then one last question from me, we were in, I was in DC just not that long ago maybe a few weeks ago and met with Dewey and Statenferck and the White House etcetera and there seems to be a lot of push for actually moving forward with LNG exports, despite some of the negative press that you've seen it seems that the administration leads it’s for some amount of LNG exports from the U.S. How are you guys thinking about that opportunity and are you actively as I know we have some 20 or so permits waiting for some form of approval, are you guys actively engaged with those potential orders of facilities on design and equipment sales etcetera.
Sam Thomas
Number of them, yes, we're quite happy to see and then believe we'll participate in a number of export facilities, but are also confident that the supplies of natural gas are sufficient that it won't be a contributor to the development of LNG vehicle transportation.
Operator
Thank you sir, our next question comes from the line of Tom Hayes with Thompson Research Group; please go ahead your line is open.
Tom Hayes - Thompson Research Group
Sam and Michael I'm just wondering if you could maybe give a little bit of outlook what you're seeing on the industrial gas side of the business especially here in North America.
Sam Thomas
I think that the recent calls we did Airgas and Praxair’s conference call earlier this week are indicative that the business has been fairly flat, with reluctance on the part of our major customers, the industrial gas producers and distributors to invest too much in capital, having said that they all are anticipating that their activity levels will be improving.
Tom Hayes - Thompson Research Group
Okay, the second question, maybe provide some commentary on the pricing you're seeing in the market is it remaining rational and are there opportunities for increases this year.
Sam Thomas
Pricing is remaining rational, I don't see a lot of upward opportunity on pricing primarily from the standpoint that our pricing ability has typically been related to commodity cost or capacity utilization and we see very little commodity cost pressure going forward this year and there is capacity available in our industry.
Tom Hayes - Thompson Research Group
Okay and I guess just lastly, you mentioned in the BioMedical segment some good activity in the pressure swing absorption the small onsite, this is that you acquired maybe could you just provide a little more color on there and where you can see that growing over the next two years or so?
Sam Thomas
Sure, two areas anywhere in the world where you don’t have established industrial gas producers and distribution of liquid or high pressure cylinder gases, so around the world and particularly in less developed parts of the world, another application that seems to be getting interesting penetration with the use of onsite generating plants for producing oxygen for ozone for higher wastewater treatment or drinking water treatment where historically those plants are liquid oxygen storage tanks to feed the ozone generators, the new economics workout that onsite pressure swing absorption plants are more cost effective.
Operator
Thank you, sir. Our next question comes from Rob Brown with Lake Street Capital.
Please go ahead. Your line is open.
Rob Brown - Lake Street Capital
Good morning, Sam, you’ve talked about coding activity picking up E&C, could you give little more sense on how those orders could start to hit in the back half of the year and what kind of sizes of order share here quarter end?
Sam Thomas
By (inaudible) fuzzy territory there, we see a lot of interest in LNG liquefier applications. We’ve had good order flow from China with a number of projects that we expect to be awarded over the next six months.
We have a significant number of liquefier projects here in the U.S. where we’ll be providing the full plan.
We also have much broader range of applications where we would be providing the heat exchangers and cold boxes for those. The next strong market currently is petrochemical with both pH and ethylene plants expected to go forward.
The pH plants are both U.S. and Asian based, the ethylene plants are all U.S.
based. And we expect to see several ethylene plants at least two, potentially three in 2013 or early 2014.
In addition, while there was some slowdown in awards for new national gas processing applications end of 2012 that activity seemed to be coming back up again.
Rob Brown - Lake Street Capital
Okay but in general you feel that your order rates Q1 should probably be your lowest order rate for the year, is that fair to say?
Sam Thomas
I believe so. Correct.
Operator
Thank you, sir. Our next question comes from Martin Malloy with Johnson Rice.
Please go ahead. Your line is now open.
Martin Malloy - Johnson Rice
Good morning. Could you talk about the timing of when some of the larger cold boxes are going to be shifted and perhaps if you’re wiling talk about exit rate range for the gross profit margin for the E&C segment as these lower margin larger projects move out?
Michael Biehl
Yes, we shift the boxes for the Qatar project, ExxonMobil gas project that went last week. So that is gone.
We have currently still four boxes in backlog. That we are working on two for the Wheatstone project, two for Pacific APLNG in Queensland.
So we expect, I believe, two of the boxes to go this year. Certainly one of the Queensland Curtis boxes, Pacific APLNG later in the year.
And then as we get into’14, the other two, one for Wheatstone and the last one for APLNG will go. And then I believe the last one for Wheatstone goes at the beginning of ’15, but it could go before that.
It is hard to predict where they’ll come out at the end, as you are aware we do put on certain contingencies and project reserves as we go forward, and you know sometimes we use them up, sometimes we don’t. So it’s really hard to predict but, we are using call without the order, as we did last year when we do ship a project and have good execution on it and as you saw in this quarter we had some higher cost on the project and they said the -- project shipped, but and we have the potential in the second quarter for some change orders and I can’t really give a number because we are in the process of negotiating that but that would come back and recoup some of those cost, but under the accounting principles we have to take the cost at the time they would realize and they get a change order signed to recognize this.
Martin Malloy - Johnson Rice
And then on the LNG liquefier side, can you, if you are providing the whole facility, can you give us a range that would help us with the size of that?
Sam Thomas
Yes. Our standard plant sizes are 100,000 gallons per day, 250,000 and 450,000 gallons per day.
The lower end of those plants is roughly $15 million to $17 million worth of our equipment. The 250,000 plant is a bit more than double that in terms of our equipment content.
And I apologize that I don’t have the numbers at hand for the 450,000 gallons per day plant.
Martin Malloy - Johnson Rice
And the gallons per day, is that diesel equivalent or is that LNG?
Sam Thomas
It’s LNG.
Operator
Our next question comes from the line of Cullen Roche with Northland Capital Market; please go ahead, your line is open.
Cullen Roche - Northland Capital Market
Can you talk a little bit about lead times as you go forward into end of the second half, and are you expecting to see an acceleration in orders as you sort to see the 12-liter come on and what the magnitude of that would be on the impact of your guidance?
Sam Thomas
As 12-liter engines become available, what that will drive for us is LNG vehicle tank sale. The lead times for those are relatively short, they are probably in the lead timeframe.
We have significant capacity available and are able to add capacity in significant ramp ups of capacity in sort of three to six months’ time, so I think we have the availability to meet market demands with little problem as that ramp up occurs, I think that there will be some limits as to how quickly we see that demand go up for vehicles based on LNG availability in ’14 timeframe. Once you get beyond 2014 I think there will be significant amounts of LNG available.
Cullen Roche - Northland Capital Market
And outside of this 12-liter opportunities, are you seeing lead time shortened at all or orders accelerated in any other segments.
Sam Thomas
Well, we are generally reducing lead times with our capacity additions on all product lines and in all regions. So, I think that our ability to address the ramp-up of the markets is very very strong.
And you can see we are continuing to grow our SG&A particularly in the D&S business because we are very confident in the growth opportunities of this market.
Cullen Roche - Northland Capital Market
Great, and just speaking of SG&A; can you talk a little bit about how we should think about that by segment. You mentioned that it’s going to decline as a percentage of sales, but how should we think about the progression on an absolute basis as we grow through the air?
Sam Thomas
On a dollar basis, it will go up because of the; the addition of AirSep in there and then the ramp-up in LNG basis; building out that infrastructure. So, we are going to be probably around the 49 million range in total per quarter maybe a little bit higher than that so end of the year I would say between 195 and 200 million so somewhere between 16% and 16.5% of sales.
Operator
Our next question comes from the line of Greg McKinley with Dougherty. Please go ahead, your line is open.
Greg McKinley - Dougherty
Sam, you started off your comments by talking about domestic liquefier capacity trends. You have mentioned that Chart has been engaged in some early FEED contracts.
So, we see all these news all the time, I wonder if you could maybe highlight for us what are some of the more significant liquefier capacity trends that are occurring in North America and is there a way to quantify where we maybe six to twelve months ago, in terms of that capacity versus where we are or where you think we might be in the near to midterm, any simple way of setting that up for us?
Sam Thomas
Well, of the public announcements, Shell will cause prominence, and I refer you to their press releases. The construction times have most of the capacity coming available late 2014 or early 2015.
Although, the plants are currently under construction, we're currently -- have been announced in the process of going forward. It’s not enormous new capacity coming forward in 2000 online producing LNG in 2013 perhaps have been some announcements of capacity additions with existing LNG plants, one in particular last week was halt.
Announcing in addition to their facilities, in terms of how it has progressed over the last six months, there is significantly more activity, significantly larger number of companies who are in their approval process to move forward with LNG’s liquefiers.
Greg McKinley - Dougherty
Okay Sam, you had mentioned that Chart was involved in some FEEd contracts upfront, what was the customer you identified with that?
Sam Thomas
Stabilis energy.
Greg McKinley - Dougherty
Okay, Michael where is CapEx likely to be; for the year as you guys build out your facility?
Michael Biehl
Little bit lower than we had anticipated in the first quarter just because of the timing, but would expect it to be in between in $80 to $85 million range for the year. So, as we go forward, we should see it ramp-up because of the project expansion across and we will start to see more spending there.
And we are still on target to have that completed by the end of the first quarter, to take down production and as Sam indicated we are already taking order on it, with new production expansion but right now everything is on target, the expansion that we are doing in the New Prague, Minnesota because of the weather, it’s a little bit behind, it would expect it to be completed end of the third quarter versus usually at the end of second or third. And as year goes on, you will see that CapEx accelerate.
Greg McKinley - Dougherty
And then just moving to BioMed for a moment if we can, how much did AirSep contribute to Q1 and then can you may be talk about what are some of the breakpoints you are looking for either with this domestic Medicare competitive bidding or the Italian reimbursement issues, what are the one or two things that will be a breakpoint for this business to loosen up for you guys a little bit?
Michael Biehl
We see we added about $27 million sales for the first quarter and we are making, I think very good progress there with that business, still we consider that as a very strategic acquisition for our respiratory business, on the Medicare competitive bidding process, our understanding is that the suppliers were notified sometime in the last few months, they didn’t make it public but they are supposed to go on effect July 1 and with the second phase and we would expect built into our forecast is sort of a recovery on the order side but late in the third quarter.
Sam Thomas
More points if I add to that Greg would be the European market particularly Southern Europe, it’s the (inaudible) we see increased order activity; when the weather gets hot, people have a harder time breathing, so it’s July, August, September timeframe, that we will anticipate seeing improved order activity from Europe.
Michael Biehl
And the demand is there Greg; I mean they need the equipment so it’s ultimately going to go forward.
Greg McKinley - Dougherty
And then may be just one last one, why did margins there, BioMed recover so sharply sequentially despite, not much volume changes sequentially?
Sam Thomas
The changes in, lot of these changes in the AirSep business that we are making, putting in more margin discipline. So I will describe it.
We will see probably sales lower than expected over the year for BioMed but margins improving because we were walking away from some low margin business. And, we think we will continue to make good progress there.
We also had a favorable cryobio sales in the first quarter that added to that those are pretty decent margins.
Operator
Thank you, sir. Our next question comes from the line of Bill Priebe with Geneva Capital Management.
Please go ahead, your line is now open.
Bill Priebe - Geneva Capital Management
I am getting a little nitpicky here but originally the consensus was for quarter quite a bit higher and you did really address it and obviously this is such a lumpy business; I am looking at the consensus number with $0.67 on 285, you really didn’t address that, what happened?
Michael Biehl
Couple of things, Bill. We don’t forecast our quarters, we only forecast the year, so often it may be off, first quarter is typically our lowest quarter, if you look back historically it’s been like that, so this is no different.
Second thing, is that, we did have a few execution issues in the quarter, one on the E&C project and one on a distribution and storage project and we incurred higher cost, and that cost is about $0.10 per share in terms of where we thought we would be but nonetheless we reiterated our forecast for the year and are confident in that and there is an opportunity to recoup some of those costs on the energy and chemicals side but again under the accounting principles you have to recognize the cost in this quarter until get a assigned change agreed upon change already can’t recognize that revenue in additional profit so likelihood is that we will see some recoup of that in the second quarter on the energy and chemicals project.
Bill Priebe - Geneva Capital Management
Okay one just a follow up on that obviously your reputation deserves (inaudible) for a very well-run company, is there anything you learned from that? Are you taking steps to try to make sure that does not happen again?
Or in your business is it unavoidable I guess there are two options there.
Sam Thomas
Well we have talked about two projects where we had for us disappointments in the execution, meaning in one project, the BUC project our primary relationship is with the end-customer and so we are not going to let a dispute with the EPC contractor affect our delivery performance and our reputation with the end-user so as a matter of our long term business strategy you put your head down and you deliver the product on time and then if I afterwards to be compensated more appropriately.
Bill Priebe - Geneva Capital Management
Okay that makes a great deal of sense.
Operator
Our next question comes from the line of Jeff Osborne with Stifel Nicolaus; please go ahead your line is open.
Jeff Osborne - Stifel Nicolaus
But a couple from my end, Sam, I was just wondering if you could talk about what you are seeing in the M&A pipeline that you folks have built up over the last couple of quarters?
Sam Thomas
Continued opportunities a number of areas that we continue to explore and find interesting but very difficult to comment on them until asked.
Jeff Osborne - Stifel Nicolaus
And then just two quick ones for Michael on the tax rate what should we be assuming for the year and then also I just wanted to understand in better detail you mentioned the Qatar projects and Australia but the larger projects that you folks had had on the E&C side I think in the past were about a third of the mix I just want to understand how we should think about that over the next couple of quarters if third of the E&C revenue was roughly similar this quarter as well?
Michael Biehl
Yes, in terms of the tax rate I would still continue to look at a 30% rate even though it was lower in the first quarter for 30% for the year on the large projects a lot of the revenue that is coming through this year for energy and chemicals is related to those large projects as they roll out of backlog. I don’t have the exact numbers, but I think it is higher than the third this year so it is weighted a lot towards those projects and keep in mind that they were taken a year or maybe two years ago and they are at lower margins at the time.
So it will neutralize some of the E&C margin on an average basis that we see roll through this year but as we move through the year as we get more towards the end of the year we should see a little improvement in the E&C margins and as we go forward we should see some improvement.
Jeff Osborne - Stifel Nicolaus
Understand. I assume it is safe to assume that the E&C issue that you have with EPC got us wrong and was not associated with one of these larger projects?
Michael Biehl
Yes it was as a matter of fact.
Jeff Osborne - Stifel Nicolaus
It was okay.
Michael Biehl
It was what the Qatar project that we shipped.
Jeff Osborne - Stifel Nicolaus
So if there is a reclaim are you able to reverse the cost of that would that just flow through as 100% profit as an adjustment?
Michael Biehl
Yes it would and that would likelihood is in the second quarter but again we can’t comment on the size of it because we are still negotiating that and down to the kind of growth that is exactly how we are going to have to do.
Operator
Our next question comes from Randy Bhatia with Capital One Southcoast please go ahead your line is now open.
Randy Bhatia - Capital One Southcoast
If I could, just switching to back to China quickly, can you comment a little bit on how competition is unfolding in that market. I think you talked about in the past that absolute profit dollars on projects in China are little lower than they are elsewhere just given the rapid development of competitors.
Are you seeing that, is there any degradation that we can assume and as bid margins for those D&S projects that you’re booking today?
Sam Thomas
Total margins are generally improving as our volumes go up and we move down to learning curve on productions as well as we are successfully reducing our costs by sourcing more and more components locally. In terms of the overall market for the distribution, storage equipment we provide, there are two significant competitors and then there are lots of new entries coming in on a monthly basis.
Randy Bhatia - Capital One Southcoast
It sounds like those new entries aren’t yet impacting, how you’re bidding and what margins are looking like on projects you are wanting today?
Sam Thomas
That’s correct. We are intent on continuing to be a major player and wining market share but at the same time improving our profitability and we believe we can accomplish that.
Randy Bhatia - Capital One Southcoast
Just one more, you could comment a little on the labor inefficiencies that you referenced in at 400 basis point margin impacts in the E&C segment. Can you talk about where you saw that with that, do you feel like it was specific to a particular project; is that something that is specific to a particular location and how you’re kind of dealing with it?
Sam Thomas
It was one project, one location and it was making us work where design changes had occurred requiring relay out of pumps kits and redesign of pumps kits where we have to live with labor and efficiencies by having more people than should have been working on the project, working on it in order to meet the end customer requirements.
Randy Bhatia - Capital One Southcoast
Okay. So, it was a direct result of the script changes that you guys saw on that project.
Michael Biehl
Yes. It was in addition, but again to meet their delivery schedule which we thought was a burden because in that project over there, there is potential for another four large base low boxes that may come through and once to get up and running potential for possibly two more next year.
So, we wanted to make sure the first two that we delivered there we did EPI delivery schedule. .
Operator
Thank you, sir. Our next question comes from the line of Alex Potter with Piper Jaffray.
Please go ahead, your line is now open.
Alex Potter - Piper Jaffray
I just have one really quick one here, it’s kind of academic question. It’s easy to understand why LNG demand should be ramping in the U.S.
because you’ve got incredibly cheap shale gas reserves and gas is just so cheap. In China gas isn’t that cheap, it is that the retail level because you basically have government intervention in the pricing of natural gas but you have the importers now of natural gas losing lot of money on that and pressuring the government to increase natural gas pricing.
So, what I want to ask is whether or not you guys think of this as a potential risk, you know the upward pressure on natural gas pricing or not.
Michael Biehl
Not at all, the issues you discussed regarding pricing of natural gas and losses that state owned enterprises like PetroChina are incurring in their imports of LNG are based on the fact that it’s government entity that is contracting under long term contracts to import LNG at whatever contract price is, whether it's 7-10 or even $50 of per (inaudible) and the government also for pipeline grid applications, either for power generation or for domestic using, usage effectively paying the sale price of natural gas at slightly over coal prices. That’s a one pocket of the government deciding what the other pocket of the government is going to do.
Sam Thomas
Quite separate from that is the fact that LNG is not competing in that and natural gas has LNG or vehicle transportation fuel is not sold at those are officially low prices. The government has also said that LNG as vehicle transportation fuel will be sold at 70% of the price of diesel and from a Chinese perspective LNG obviously that represents a significant savings to the guy operating a truck but on BTU basis it's far less expensive for the Chinese government to use LNG at that price level than it is to buy oil, refine it to produce diesel and consume it.
In addition to that the Chinese do not have but they've got a rapidly expanding truck population or full vehicle population. So they have to add additional infrastructure that would mean, additional oil imports, additional refineries and very high cost refineries because most of the refineries in China do not produce low sulfur diesel.
So if they continue to use diesel rapid than LNG there's going to be a significant pollution penalty from that, by using LNG they actually avoid building a number of 10 billion, 20 billion dollar refineries, so it's a very economically compelling argument for China as well.
Operator
Our next question comes from the line of Lee Colin with Hermann; please go ahead your line is now open.
Lee Colin - Hermann
Hi, thanks, just had two quick questions, one was could you talk just a little bit about some of the cash flow and working capital dynamics and whether there's anything different than what normally happens seasonally or how you'd expect it to be this year and then lastly just wanted to a little more color on the gas air compression market you mentioned earlier, how there was a bit of softness here but there were some early signs of pickup and just wanted to get a little more color on whether you expect that to pick up sequentially or whether you expect it to be more flattish for a couple of quarters or what's it really depend on. Is it the natural gas rig count?
Sam Thomas
On the cash flow side, first quarter's usually our biggest use, and as we go through the year it will become less and we become pretty cash generative in the third and fourth quarters, but you know with the rapid growth that we're undergoing working capital certainly, the build there will continue to be a major element. One difference, that we're seeing this year in China, which in the last two or three years we funded them from the U.S.
they look like in terms of projections we have now look to be self-sufficient in terms of cash flow which is great, and would expect as they continue to grow that that will continue to be the story, but right now we will be fairly cash generative we expect for the year, we do have a significant amount of it going to CapEx, but even beyond that we think we'll have fairly significant free cash flow generations here. Addressing your question on air-cooled heat exchanger market and compression and for poor compression the number of gas rigs is indicative but with fracing as horsepower requirements go up and larger, (inaudible) that also drives and as horsepower so it is more directed really it’s a total horsepower in operation because that’s what drives air-cooled heat exchangers.
We also see lots of potential opportunities for air-cooled heat exchangers in process designs for not using water coolant. So generally after a weak fourth quarter and weak first quarter we’re more hopeful that we’ll see continued improvement in that market.
Operator
(Operator Instructions). Our next question in queue comes from the line of Robert Norfleet with BB&T.
Please go ahead. Your line is now open.
Robert Norfleet - BB&T Capital Markets
Good morning, most of my questions have been answered but just a couple, as you talked about the North American LNG market it looks like there is several projects outside of the saving past that you know could be awarded by end of this year beginning of next year, so I just wanted to understand assuming a sponsor makes a final investment decision and awards the EPC contract, what would be the timing and when you all would get that award?
Sam Thomas
Generally the longest lead time I have at this point are the compression equipment and so that’s typically awarded very quickly after a final investment decision to proceed and the heat exchanger cold boxes come within a couple of months, so that will work.
Robert Norfleet - BB&T Capital Markets
Okay great and my second question just deals with escalating LNG obviously there has been a lot of discussion at some operators especially in Australia due to cost inflation or looking to move away from on shore liquefaction deployed in LNG there are few obviously projects that are currently underway, what is your thought on FLNG, is it a risk or a threat to Chart or is that actually an opportunity for you all?
Sam Thomas
All our equipment is being utilized on a number of FLNG projects and we feel that brazed aluminum heat exchanger are very well suited to the application and so feel confident that that’s it’s a good opportunity just as land based LNG is for us.
Robert Norfleet - BB&T Capital Markets
Can you just quickly for example like a project like (inaudible) what would the amount of content you would have on a vessel?
Sam Thomas
I think prelude is the Shell projects or the Exxon projects?
Robert Norfleet - BB&T Capital Markets
Shell.
Sam Thomas
Shell is utilizing to the best of my knowledge air products spiral wound, heat exchangers all in that and I believe it was a total of about 5 million tons per annum if that were done with brazed aluminum heat exchanger it would likely be something on the order of $100 million worth of equipment.
Robert Norfleet - BB&T Capital Markets
Great that’s very helpful, thank you.
Operator
Thank you sir and at this time I’m showing no additional questions in the queue. I would like to turn the program back to Sam Thomas for any additional or closing remarks.
Sam Thomas
Just at concluding remarks I would like to reiterate that LNG infrastructure built out as accelerating and we’re particularly excited about the recent announcements here in North America. The quarter’s strength and coding activity validate our capacity expansion projects and then we continue to be recognized as an industry leader as evidenced by the order awards and demand from our technical expertise.
Thank you everyone for listening today. Good bye.
Operator
Thank you presenters, and again thank you ladies and gentlemen for your participation. This does conclude today’s conference.
You may now all disconnect and have a wonderful day.