Jul 30, 2013
Executives
Michael Biehl - Executive Vice President, Chief Financial Officer and Treasurer Samuel Thomas - Chairman, Chief Executive Officer, President and Director
Analysts
Colin Rusch - Northland Capital Eric Stine - Craig-Hallum Brian Uhlmer - Global Hunter Rob Brown - Lake Street Capital Greg McKinley - Dougherty John Allison - BB&T Capital Markets Tom Hayes - Thompson Research Group Pavel Molchanov - Raymond James Chase Jacobson - William Blair Jeff Osborne - Stifel Martin Malloy - Johnson Rice Chapman Deng - JPMorgan Tom Nowak - Advent Capital
Operator
Good morning and welcome to the Chart Industries, Inc. 2013 second quarter earnings conference call.
(Operator Instructions) 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, August 9. The replay information is contained in the company's earnings release.
Before we begin, the company would like to remind you that statements made during this call that are not historical in fact are forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied in the forward-looking statement.
For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the information regarding forward-looking statements and risk factors included in the company's earnings release and latest filings with the SEC. These filings are available through the Investor Relation 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, CFO and Treasurer.
You may begin your conference.
Michael Biehl
Good morning everyone. I'd like to thank you all for joining us today.
I'll begin by giving you a brief overview of our second quarter results. Then Sam Thomas will provide comments on current market and order trends we see in each of our business segments.
And I'll finish up by commenting on our outlook for the remainder of 2013. We reported net income for the second quarter of 2013 of $20 million or $0.64 per diluted share.
This included costs of $4.8 million or $0.11 per diluted share, largely associated with the company's acquisition of AirSep, in our BioMedical business, and flood damage at our Distribution and Storage or D&S operations in the Czech Republic. This quarter also includes a $0.02 per diluted share impact associated with additional shares taken to account for our convertible notes.
Therefore, earnings per share for the second quarter of 2013 would have been $0.77 per diluted share, excluding this additional dilution and the cost that I mentioned above. This compares to second quarter 2012 net income of $17.9 million or $0.59 per diluted share.
The prior year quarter earnings would have been $0.57 per diluted share, excluding $1.1 million of favorable acquisition related earn-out adjustments, partially offset by impairment charges and the write-off of deferred financing fees. I'm going to now briefly explain the dilution impact from our convertible notes.
The refinancing actions the company underwent in the third quarter of 2011, allowed us to refinance our former 9% and 8% senior subordinated notes due in 2015, with a 2% convertible notes due in 2018. This refinancing has provided us with cash interest savings of $10 million annually, which has improved our liquidity and our ability to invest in growth opportunities.
We believe this has contributed to our success, as evidenced by the strong growth performance in across our businesses. With that said, an additional 864,000 shares must be considered dilutive for the second quarter, under generally accepted accounting principals or GAAP, because our average market price in the second quarter exceeded the notes conversion price of $69.03 at a warrant strike price of $84.96.
We purchased a hedge to offset some of this dilution, but it cannot be considered in our GAAP calculation of diluted earnings per share. The hedge allows the company to receive Chart shares at the notes conversion price of $69.03.
If the conversion occurs, effectively offsetting additional shares to the note holders. In the second quarter, the average common stock price was $87.43 per share, which resulted in the convertible notes, converted into approximately 750,000 additional shares.
Our purchased hedge would have mostly offset this dilution, if conversion occurred. Or as I mentioned previously, under GAAP, the hedge is considered anti-dilutive, and therefore cannot be considered when computing earnings per share.
It's also important to understand that to offset the cost of this hedge, the company sold warrants at the same time, with the strike price of $84.96. This limits the bond hedge counterparties exposure, in the event that Chart's stock price exceeds $84.96 per share.
These actions effectively enable us to increase the price in which real economic dilution occurs, when the notes are converted from $69.03 to $84.96. To summarize, approximately 864,000 shares are included in the diluted EPS calculation in the quarter, but approximately 755,000 of these shares are covered by the hedge that we purchased.
The difference between the 864,000 and 762,000 shares represents the impact from the warrant sold as part of this financing transaction, while our stock price exceeded the warrant strike price. Beginning July 1, the notes became convertible at the option of holders, since Chart's stock price came above $89.74 per share for at least 20 trading days in the last 30 trading days in the second quarter.
Therefore, the long-term portion of the notes was reclassified as a current liability and a portion of notes included was reclassified as temporary equity in our consolidated balance sheet of June 30. However, we don't expect note holders to convert early, as they would give up their 2% interest coupon, if they did.
Sales for the quarter were $298 million and represented an increase of 24% compared to net sales of $240 million a year ago. The improvement is associated with strong end-market trends in LNG-related applications, especially at our D&S business in Asia.
AirSep was closed in the third quarter of last year, contributed approximately $30 million sales in the second quarter. Our gross profit for the quarter was $89.8 million or 30.1% of sales compared with $74.1 million or 30.9% of sales a year ago.
Overall margins were down year-over-year, primarily due to a higher acquisition related costs from AirSep and some changes in product and project mix across our businesses. With respect to the E&C business, sales increased 2% to $79 million in the second quarter and gross margins were 29% compared to 30.2% in the prior year quarter.
Gross margins were slightly lower due primarily to a shift in project mix to a large base-load LNG projects coming out of backlog into revenues in the current quarter. As mentioned last quarter, some higher cost on one project due to labor inefficiencies and project scope changes have negatively impacted margins in the first quarter.
In the second quarter, we were able to recover some of these costs to a change order with the customer, and we're able to push several short lead time orders to our facilities, which is in total positively effective margins by about 2%. In D&S, second quarter sales increased 30% year-over-year to $147 million driven by improved volume, particularly in LNG equipment shipments.
Gross margins for D&S improved to 28.4% compared with 27.2% a year ago due improved throughput and mix. Margins were also negatively impacted by about 1% due to flooding that occurred in Central Europe in early June.
Our operations in the Czech Republic incurred inventory damage, for which we filed an insurance claim. The impact therefore represents the cost of our insurance deductible with any loses in excess of the deductible expected to be covered.
In our BioMedical business, sales increased 47% to $72 million in the second quarter of 2013 compared with $49 million for the same quarter in the prior year. The increase is due to the AirSep acquisition, which added $30 million in revenue in the quarter.
Additional revenue from AirSep offset lower overall shipments in respiratory therapy equipment, as a result, a weakness in Europe and the continued uncertainty related to Medicare competitive bidding in the U.S. BioMedical gross profit margin decreased to 34.7% in the quarter compared with 40.4% for the same period in 2012.
The decrease is primarily due to additional acquisition charges related to AirSep, lower volume in respiratory and changes in product mix with lower margin oxygen concentrators, representing a much larger share of sales following the AirSep acquisition. If the AirSep acquisition charges were stripped out, the BioMedical gross profit margins would have been 38% for the quarter.
SG&A expenses for the quarter were $51.9 million, up $17.2 million from the same quarter a year ago. The increase is largely due to added expense from the AirSep acquisition, in addition to an increase in employee-related cost and external commissions as we pursue LNG-related growth opportunities both in U.S.
and in Asia. SG&A as a percentage of sales were 17.4% compared to 14.5% in the prior year quarter.
Included in the SG&A in the current quarter was $1.3 million retention in severance cost associated with the AirSep acquisition. Second quarter 2012 SG&A included $4.4 million or 1.8% of sales in favorable net earn-out adjustments associated with prior acquisitions, which reduced SG&A expense in that quarter.
Net interest expense was $4 million for the second quarter, which included $2.4 million of non-cash accretion expense associated with the company's convertible notes. Therefore, cash interest for the second quarter was just $1.6 million.
Net cash interest expense in the second quarter of 2012 was $1.4 million. Income tax expense was $8 million for the second quarter and represented an effective tax rate of 27.9% compared to an effective rate of 33% in the prior year quarter.
The decrease is largely associated with an increase in foreign earnings and recognition of foreign tax loss carryforwards, and other deferred tax assets given our strong performance in China. I'll now turn the call over to Sam Thomas.
Samuel Thomas
Thank you, Michael, and good morning, everyone. We're very pleased to announce another successful quarter.
The growth of LNG infrastructure for liquefaction, transportation and as a diesel fuel substitute continues to gain momentum, driven by the spread between oil and natural gas prices. China has clearly taken a lead, where in addition to cost environmental considerations are driving action by government officials at all levels.
Today, we announced another order from PetroChina for self-contained LNG station module. This is the third major work from PetroChina received in the last couple of quarters and will be included in our third quarter orders and backlog.
It's notable that this represents a sale through a company within PetroChina, operating in a different geographic region of China, Shandong Province compared with the two earlier orders. Our self-contained LNG station modules represent an innovative development of flexible LNG fueling station for a fast growing and dynamics LNG market.
We pioneered this solution in China, and it represents the kind of opportunities that align Chart's culture of innovation, experience and performance with growth prospects to the new LNG economy is opening up around the worlds. We also continue to provide heat exchanger and cold boxes for LNG small and mid-liquefaction plant build-out in China.
In North America, essential infrastructure is being build that puts North America on a similar trajectory to China, in providing LNG as a diesel fuel substitute. We are providing heat exchangers and cold boxes for a number of small and mid-scale liquefiers currently under construction in North America.
We're able to provide a range of standard LNG plants, designed fully in-house, which will put our customers on a fast-track schedule for earlier commencement of LNG production. We believe these order wins across the company are strong evidence of the market's recognition of Chart, as a leader in LNG infrastructure and liquefaction equipment.
And we're happy to announce a new record in quarter-end backlog of $664 million. Let me now comment on some specific highlights for each of our business segment.
Within Energy and Chemicals, our business booked $78 million of orders in the second quarter, up sequentially from $39 million in the first quarter. We're also delighted to announce that Noble Energy has awarded Chart a contract, provide an LNG liquefaction facility to produce approximately 100,000 gallons of LNG per day, which they will use to service their own operations in Northern Colorado.
These standard plants are complete package solutions, which minimize on-site construction time and scope. The primary benefits for customers choosing one of our standard plants design is that it allows a fast-track scheduled LNG production, while being robust and flexible enough to use a wide range of feed gas compositions.
We anticipate that more small scale LNG liquefaction opportunities will develop and that our experienced LNG plant design will continue to provide us with the competitive advantage. Also this quarter, Chart E&C has secured an order to provide equipment for an ethylene plant here in the U.S.
With the growth of natural gas liquids feedstock we expect more of these petrochemicals opportunities to develop as global GDP growth improves. In our air cooled heat exchanger business sales of gas compression market remains soft.
We've reduced gas drilling activity. We have, however, substantially improved our sales for process cooling applications for gas processing, liquefaction and petrochemical applications, leading to the second quarter of 2013 as the best quarter for new orders since late 2011 encouraging development.
Finally the update you on our brazed aluminum heat exchanger capacity expansion project, we are still on schedule for the first quarter 2014 ramp up and as previously mentioned we've begun to take orders on this capacity. With respect to Distributions and Storage, we've booked record orders of $222 million in the second quarter.
This includes the PetroChina award we announced in April, but does not include the order announced today, which we will include in the third quarter. D&S orders are up 67% sequentially compared with the $133 million of orders in the first quarter.
We booked record orders in Asia due to the ramping LNG infrastructure build-out occurring in China. The PetroChina award announced today in excess of $50 million is for self-contained LNG station module.
This is in addition to the PetroChina awards we announced in April for $45 million and the fourth quarter of last year of $40 million. In addition, we're seeing increased quotation activity for LNG infrastructure in Southeast Asia.
This quarter, we purchased an 80% equity interest in Nanjing Xinye Electric Engineering based in Nanjing, China. This will provide us with key localized dispensing and control technology to improve our LNG product offerings in the Asia regions.
D&S also had a quarter in Europe and the U.S. The U.S.
regionally saw its best order intake in over a year due to increased activity for LNG bulk storage as more and more liquefaction opportunities emerge. In Europe, we utilized on our capacity to supplements our capacity in Asia and the U.S., as well as seeing increasing activity for LNG infrastructure build in Europe, particular from marine applications.
Strategically we remain committed to being a major catalyst in the LNG market because we understand that liquefaction will lead to storage orders and increased end-user LNG equipment including heavy-duty trucking, rail and marine applications. Capacity additions plans continue to progress nicely throughout the business and we will continue to evaluate opportunities to expand capacity further to ensure that we are positioned to deliver on these opportunities and meet our customer demands.
In our BioMedical segment orders of $70 million were down slightly compared to $72 million in the first quarter. Orders for respiratory equipment in the second quarter have continued to recover.
We're encouraged by positive orders trends we have recently seen in our respiratory business. However, uncertainty around the Medicare competitive bidding awards is still causing concern in the market, as providers struggle with the financial implication of changes and the impact on their business.
We continue to position ourselves for when the industry recovers by partnering with our customers and providing them a broad range of respiratory product offerings. We'll particularly encourage over the long term about opportunities in emerging markets such as China as population, age and wealth levels arise.
We're laying the foundation now to meet what we expect to be a significant future to see. Orders for cryobiological cold storage equipment remain strong, with particular growth in Asia for cancer research and cold blood storage.
We expect on-site gas generation will be a strong growth driver for BioMed. However, these orders are likely to be lumpier, similar to our systems businesses in E&C and D&S.
Michael will now provide you with our outlook for 2013.
Michael Biehl
Thanks Sam. Our second quarter results were solid.
We remain optimistic about continued growth through the rest of this year. Therefore, based on year-to-date results, earn-out and backlog and business expectations, the company is reaffirming its previously announced sales guidance, but tightened the range of its earnings guidance.
Sales for 2013 are still expected to be in a range of $1.2 billion to $1.3 billion, but diluted earnings per share are now expected to be in a range of $3.10 to $3.40 per diluted share on approximately 30.6 billion weighted average shares outstanding. This excludes the impact of $0.15 per diluted share in anticipated AirSep acquisition cost and any dilution impact resulting from the convertible notes.
This compares with previous earnings guidance of $3 to $3.40 per diluted share, which excluded $0.10 per diluted share in anticipated AirSep acquisition cost and any dilution impact resulting from our convertible notes. We'd now like to open it up for questions.
Operator, please provide instructions to the participants to be able to ask questions.
Operator
(Operator Instructions) Our first question comes from the line Colin Rusch from Northland Capital.
Colin Rusch - Northland Capital
Can you walk us through the decision making process for potential capacity expansions? And what do you need to see from your customers to get comfortable adding capacity?
Samuel Thomas
Orders are the best thing. However, that often times doesn't provide enough time to put capacity in place, if it requires bricks and mortar.
So what we look for is a level of quotation activity with customers, what they have to say about their future needs. And it frequently involves going upstream and looking what their customers are saying or understanding what the availability of financing is for that customer to give us confidence to make those choices.
Obviously, it's easier when we have multiple customers that are pursuing the same opportunities or pursuing parallel opportunities, so that we're able to sell to multiple customers. It is however challenging thought, because we frequently run into situations, where customers are more optimistic about the timing of their increased needs that actually pans out.
Our benefit there is we have a management team, who are fairly well experienced to try engage those trade-offs.
Colin Rusch - Northland Capital
And as you look at the petrochemical opportunities similar to this ethylene plant, I mean how do you think that how sustainable can that opportunity be for the company do you think?
Samuel Thomas
Well, if you look at the announcements of ethylene capacity expansions and propane dehydrogenation for propylene expansions, we have the opportunity to quote on and win a significant percentage of those well over 50%. The challenge is, will they all go ahead, and in particular in the case of ethylene, each new ethylene plant does represent a significant global capacity expansion.
And therefore, the speed that those go-forward is constrained by the outlook for future growth of global GDP, which typically ethylene demand worldwide will be driven by. The economics are very favorable for these ethane-based ethylene plants, particularly in the U.S., where you have low cost natural gas liquefied stocks.
The constraint is you can't build too many new plants, if demand is falling or stable. So that's the challenge of predicting the speed that the plants will go forward, but we believe with current economics and current forecasts for GDP growth and hence ethylene, indirectly ethylene demand growth, that we'll see another one-to-three plants moving forward within the next 12 months.
I guess perhaps seven or eight announced.
Colin Rusch - Northland Capital
And then just a quick housekeeping, the Noble Energy award, was that in the 2Q bookings or that will be considered a 3Q booking?
Samuel Thomas
That's a second quarter booking.
Michael Biehl
And that's because of a backlog.
Operator
And our next question comes from the line of Eric Stine from Craig-Hallum.
Eric Stine - Craig-Hallum
Wondering, if we can just start with China, you know there's been a lot of talk of slowing growth environment there. Is it fair to say that you're not seeing that and don't expect to see that?
Samuel Thomas
Well, in our GDP growth or industrial production related growth, portions of our business in China, particularly the industrial gas industry, we've definitely seen a moderation of demand in China. However, that's significantly over shadowed by secular growth of LNG as a transportation fuel.
And we think it's largely on to be unaffected by the forecast for GDP growth rate in China, because it's doing two things; first, as the consumer economy grows in China and it's fully encouraged by the Chinese government. It means that sales of automobiles and sales of trucks to fuel this consumer marketplace are going to continue to grow.
China is the largest truck market in the world and is also the largest car market in the world, and with that being a favorite development as opposed to the export economy of China. I don't see any moderation there.
And secondly, the continuous spread of oil and natural gas prices means that China gets a big win and its balance of payments and the expenditures necessary to meet their growing energy demands for transportation fuel by using LNG, as opposed to diesel, which is refined from oil. And finally and perhaps the strongest driver within China is the air pollution issue and pollution in general, where it's become a focus or perhaps the most important focus of the Chinese government and it's transmitted through all levels, from the central government down to small cities, that improving air quality is the priority.
And one of the best ways to do that is using LNG as a transportation fuel, as opposed to relatively high sulfur diesel to minimal pollution control equipment on existing vehicle. So I think that it's fair to say that the demand for our products in China is going to be unaffected by variations in industrial production growth or GDP growth.
Eric Stine - Craig-Hallum
Maybe just sticking with China, I mean the dynamic of large orders there is fairly recent. Just wondering, now that you're into a different operating segment of PetroChina in a different geography, visibility into more orders with PetroChina, but also with other companies, similar companies in China?
Samuel Thomas
The significant size order we've announced, we have been doing business with cooling energy for a little over a year with smaller orders, exploratory orders, and developing a relationship. We are at that same point now with a number of additional regions within PetroChina or operating companies within PetroChina, and also with several of the other or in particular seen up, where we're providing equipment on smaller orders and developing a relationship with them.
So we are optimistic that we'll continue to be able to expand those relationships and the size of orders with multiple companies.
Eric Stine - Craig-Hallum
Maybe, this one, last one from me. LNG fueling infrastructure in the U.S., I know late 2012, there was a bit of a pause.
Just whether you're seeing that pick up, how you see that playing out going forward?
Samuel Thomas
The interest levels are still high. I would say that we're experiencing much of what we experienced in China of wondering why there weren't more orders, when there was so much quotation activity.
But I'm very confident that it's moving forward positively. And that as additional LNG liquid or liquefaction capacity come as online and we start to see more of the 12 liter Cummins engines on Class 8 trucks, that it will move progressively and at accelerate pace in the U.S., much the way we've experienced in China.
Operator
And our next question comes from the line of Brian Uhlmer from Global Hunter.
Brian Uhlmer - Global Hunter
I had a couple of quick ones that I want to walk through real quick on the Noble award. It sounds like you said that it was for their internal uses a second ago.
Is that accurate?
Samuel Thomas
Yes. Their plans and their justification from what they conveyed to us was primarily to use it for drill rigs and supporting fracking spreads as well as using it for their own core associates, transportation vehicles going to and from the gas fields.
Brian Uhlmer - Global Hunter
And it seem like you've been tightlipped on the magnitude of that award, is that for competitive reasons or can you help us out a little bit in terms of magnitude of that?
Samuel Thomas
It is competitively sensitive. There is a lot of activity in this area now.
Brian Uhlmer - Global Hunter
And that segue into my next question is, with that shift by the E&P companies to use biofuel or natural gas rigs. What does the environment look like right now in terms of active bids out there?
And can we see two to three more of these or double digits in the next, call it, 12 months or so?
Samuel Thomas
I would say that in the next 12 months or so it would be at the lower end of your speculation. Ultimately it will be, I believe, at the higher end.
Brian Uhlmer - Global Hunter
Do you have an update on kind of the conversion away from bunker fuel in the marine transport market and any types of green shoots out there in regards to that market?
Samuel Thomas
There is a lot of activity and interest. We did see a proposed push back of the enforcement of the lower emission regulations, but we view that more as a pragmatic assessment of how quickly the industry can actually change as opposed to any of the players in the industry breathing a sigh of relief and backing off on their plans.
We think that the use of LNG from marine application is going to be significant. It's historically has been a relatively slow changing marketplace in terms of the time it takes to see significant changeovers of shift.
But we believe that their, based on the interest and the active development by the marine engine manufacturers in providing natural gas engines and the level of activity going on amongst the navel architects in doing design work for new LNG ships and the level of activity going on in establishing bunkering stations to provide those both in Europe, China and the U.S. is such that this is a movement that's going to take several years to play out, but is moving along very, very well.
Brian Uhlmer - Global Hunter
And speaking the third one, of those topics, to the lowering end of your guidance, I guess on the revenue forecast will suggest that your margins declined slightly from current levels, while the high-end would suggest they're up. What are some of the key elements that would make a 310 number versus 340 number, and what are we doing to try and end up with the higher end of that range?
Samuel Thomas
Well, the upside always comes from executing better and so we have lots of activity to try and do just that. And as you might guess, there is plenty of pressure throughout the organization to improve our execution.
The thing that hampers that is that the market opportunities we see are significant and we believe very real. And therefore we are often times making decisions to add engineering depth, to add sales and marketing depth to make sure that we maximize this opportunity for the future, even if the actual orders or completion of projects is delayed because there are bottlenecks either within Chart or more often throughout our customer base and their customers.
So it's something that the demands growth is very real and we see it very clearly. The near-term it's very challenging for us to predict exactly how quickly things happen.
Operator
And our next question comes from the line of Rob Brown from Lake Street Capital.
Rob Brown - Lake Street Capital
In your E&C business here, nice uptick in orders, and I know you said you're taking additional orders now in capacity. But sort of what's the market demand there?
Is that still holding in solid and where are you seeing kind of the demand coming from in that segment?
Samuel Thomas
As we've talked about, the biggest near-term potential is small and mid-scale LNG for growth. The equipment for gas processing continues at a good pace.
Although, we believe it will take some completion of some of the petrochemical plants to increase demand on ethane and completion of some more propane export capacity from the U.S. to drive demand for natural gas liquids, and to come back to the peak we saw in 2010, 2011 of natural gas processing demand.
We've seen some good orders for air separation equipment, particularly in China, and we believe that going forward that will continue and as economic activity picks up it will continue. For global scale LNG, we think that we'll see additional opportunities, long-term over the next 10 years, with additional works to Chart possible, say in the second half of 2014, 2015.
On petrochemicals, there are a lot of active projects, as I mentioned for ethylene and propane dehydrogenation or propylene production. We have seen one plant go forward.
There are at least two additional plants that are close to going forward, when I say close to, we think within the next 12 months. But the speed that those go forward is going to be dependent somewhat on the macroeconomic environment of GDP growth rates.
Because as I talked about earlier, when growth forecasts are lower, it decreases the ability to sell new capacity into that market unless you see that forward growth. So clarity in global GDP growth rates will accelerate a number of ethylene plants and petrochemical plants go forward.
The economics for producing those petrochemicals from natural gas liquids at U.S. prices are very compelling, but it doesn't do much good if there is too much ideal capacity globally.
So basically all of our markets look very positive. We're a little fuzzy on the timing of how big each one gets over the next 18 months, but there is enough positives that we can continue to grow, based on that.
Rob Brown - Lake Street Capital
And then, I think you also mentioned in your D&S business that you're seeing increased quoting in Southeast Asia. I guess, could you give some color there?
Are you seeing sort of what China is doing expand in other Asian countries, so what's the dynamic there and what's the opportunity for you?
Samuel Thomas
What we're seeing is a number of opportunities for LNG liquefaction or LNG receiving terminals that are small and mid-scale, which would utilize our storage equipments. We're seeing increased interest in using natural gas or LNG as a diesel fuel replacement.
And the quality and pace of those inquires, and the progress they're making locally in terms of permitting, leads us to believe that we'll see that as a good growth potential. We've added some resources in Southeast Asia on the sales and marketing side and ensuring backup side, because we see it as a very attractive developing market.
And those discussions have included projects in Indonesia, Singapore, Vietnam and Thailand.
Operator
And our next question comes from the line of Greg McKinley from Dougherty.
Greg McKinley - Dougherty
Guys, I'm wondering, if you could talk a little bit about the acquisition environment, and for competitive reasons, I thought you'll get too specific. But when you look at your equipment capabilities today, are there any holes in your offering that you feel would give you an opportunity to fill out your offering to customers?
And is that still a significant opportunity for Chart?
Samuel Thomas
It is. It's difficult to be more specific than that.
I would say that we see significant organic growth opportunities for our business, and that's taking more of our focus and attention at the moment. But there are also a number of areas that we think are attractive growth opportunities that either with bolt-on acquisitions or even making slightly larger acquisitions in adjacent spaces could be attractive.
The timing of that is even more challenging to call than when customers' orders will go forward.
Greg McKinley - Dougherty
How are you feeling about capacity right now? It's seems that just as soon as you complete a capacity expansion with the momentum in your business, it's always difficult to sort of get out in front of where we think demand is coming from.
How do you feel about where you'll be position I guess more from a D&S standpoint over the next year or so?
Samuel Thomas
It's a challenge, but it's a good problem to have. I think that in general, in the U.S.
and Europe, we are very well-positioned, although there are some areas, some pieces of equipment, where we're operating at fairly high levels of capacity utilization, particularly on very large storage tanks that are typically used for LNG liquefaction plants or LNG receiving stations. And we have some current projects that we're working on that would expand that.
In China, we're currently capacity strapped, because it's been full 12 months, since we completed our vast capacity expansion. And so we're looking at significant capacity expansion in China within the next 12 months.
Greg McKinley - Dougherty
And then, what are your thoughts on the opportunity for Europe to emerge as a market, where LNG transport fuel activity starts picking up. Or do you see that being dwarfed in the near-term by what's going on in North America?
Samuel Thomas
I would say yes to both questions. I think that the marine market in Europe, because of the strong technology lead that Europe has traditionally had in shipping.
We see that moving forward very actively and probably being a market whose size develops on pace with North America, perhaps ahead of North America, and comparable to China. Although, the sheer size of China, means it's hard for anybody, any other region of world to be comparable to China, when it really gets down to doing things.
So the marine market, I see Europe is being a very attractive opportunity over the next few years. We are seen progress in the heavy-duty trucking market with each of the engine manufacturer is putting more effort into developing comprehensive solutions and having comprehensive offerings.
So ultimately that will come. We are also working on a number of fuel station applications in Europe that I think will continue to grow.
So that for heavy-duty transportation, the infrastructure build-out is still a couple of years behind the U.S., but they will have the capability to catch up fairly quickly.
Greg McKinley - Dougherty
And then just last question, we've talked about small-scale LNG liquefiers domestically as well as in China, can you share any thoughts on how significant those two regions will be compared to each other in terms of your business opportunities over the next 12 to 36 months? Are we seeing the U.S.
ramps so quickly that it could become meaningful in relation to what you've been doing in China the last couple of years or how do you guide us to think about that?
Samuel Thomas
I think that the pace of orders and the pace of market growth in China will continue to outstrip the U.S. for the next, probably 18 months to two years.
U.S. activity levels will ramp up quickly from late 2014.
But while, I think we'll get after 2014, I think you'll see the market share of LNG as opposed to diesel grow rapidly in North America. You have to keep in mind that the Chinese market for diesel fuel when you get out to 2015, 2016 is going to be four-to-five times the size of the U.S.
market. So with that as a caveat, it's tough for the U.S.
to actually catch up the China in terms of sheer numbers.
Operator
Our next question comes from the line of Robert Norfleet from BB&T Capital Markets.
John Allison - BB&T Capital Markets
This is actually John Allison on for Rob. First off, I guess, to add just talk about to the capacity questions.
I want to know would you consider outsourcing work to third parties to gain some additional flexibility there.
Samuel Thomas
We both consider it and do it. But we limit the amount of outsourcing on critical bits of knowledge or skills from the standpoint of not wanting to encourage more competition than necessary.
John Allison - BB&T Capital Markets
In regards to pricing, with capacity as tight as it is in E&C, could you discuss your strategy on raising prices on new orders going forward?
Samuel Thomas
Our strategy is to maximize the profit generated over the medium term and that means that this is a very fluid and dynamic situation, which is competitively sensitive, but Chart is in the position of having a very sound balance sheet with very big future prospects. So there is often times a conscious decision made to not push price as hard as you might for the short-term to have a better market position in the future.
John Allison - BB&T Capital Markets
So I guess, when we look at the potential margin expansion in E&C over the next several years, while a portion of this is from new capacity leading to higher utilization rates and fixed price absorption, are you basically saying that, I mean price is a factor, but not necessarily the largest one?
Samuel Thomas
Correct. In the markets we're selling to and at this stage of market development, ability to deliver products quickly is very important and ability to insure our customers that they will have no untoward surprises in placing orders with us, is what we think are the most important criteria for winning orders and growing.
It's also worthwhile to point out that historically in our business, one of the drivers, the largest driver for us raising prices, is associated with commodity pricing of the raw materials we use, because they are a significant part of our total sale price. And currently, while we are in a strong growth position, generally the markets for our chief raw materials are fairly soft.
So that our material price is, is very little upward pressure on those. So that tends to create a stable price environment on the sale prices of our products.
Operator
Our next question comes from the line of Tom Hayes from Thompson Research Group.
Tom Hayes - Thompson Research Group
Michael, I guess my first question is for you. Last quarter, you indicated on the SG&A line, you felt comfortable, kind of, at a $195 million to $200 million for the full year.
Is that still kind of a working assumption?
Michael Biehl
It will be a little bit, sort of, between $200 million and $210 million range. Couple of reasons, one is related to our continued LNG build or as Sam mentioned we continue to add people and infrastructure for future opportunities to position ourselves well to take advantage of those opportunities as they come forward.
And they are not going to generate revenues likely this year. So that's the primary reason.
Also other is that we have some stock compensation expense in there, the rise of our share price that increases net expense. And that's captured in the SG&A line.
Tom Hayes - Thompson Research Group
Then kind of two-part question, I guess for you, Sam, on the growth in the D&S order side. I'm assuming that most that's coming from LNG applications versus industrial gas applications.
Could you just kind of confirm that? And then as far as the big growth in the market, the growth, within your order business, is that coming from new applications coming online or are you guys taking share or a combination of both?
Samuel Thomas
First, with respect to LNG versus industrial gas applications, I think that our order intake for industrial gas applications is nominally flat on last year. And fairly well mirror is the comment that you have seen from the industrial gas makers as they've reported over the last couple of weeks of flat to slightly down on volumes.
So for the more traditional industrial gas applications, we're seeing down. We're seeing some increase in demand for some of our end-market solutions or differentiated solutions.
So for instance, the sale of bulk tanks is relatively soft. The sale of MicroBulk, which affords producers and distributors of lower cost, a method of distribution are up slightly.
The second part of your question as to new application versus taking market share, in industrial gas the growth is in newer products, newer applications. There are new competitors coming into the business.
Most of that attention is focused on LNG. I think that we're holding our own or doing a bit better than the market overall in winning our fair share of LNG-related orders.
And we find that happening both with new customers coming into the market and also more established customers who come back to Chart or give us orders because of our overall value proposition.
Operator
Our next question comes from the line of Pavel Molchanov from Raymond James.
Pavel Molchanov - Raymond James
Most of my questions have been answered, but just a conceptual one for you. So there is now something like 30 pending or under some sort of permitting process, LNG projects between the U.S.
and Canada. And I am just curious what outreach or marketing effort you guys are engaging in with respect to all of those potential project developers domestically?
Samuel Thomas
We've got a group that spends all their time calling out all our potential customers. We exhibit at all of the major tradeshows.
We talk daily, weekly, monthly with most of those companies, either the project developers, the energy companies who are the end-users, proposing to go-forward with those and the EPC contractors who are hoping to build those plants.
Pavel Molchanov - Raymond James
This maybe a little bit academic, I suppose, but any sense of when the next permit might be handed out by the DOE above and beyond Sabine Pass?
Samuel Thomas
No. I've talked at length about my forecasting capabilities being limited when it comes to predicting DOE or government action.
I claim no capability whatsoever.
Operator
Our next question comes from the line of Chase Jacobson from William Blair.
Chase Jacobson - William Blair
I don't want to be a party pooper here at the end of the call, but you mentioned that you are strapped for capacity in China and that you're going to be looking for significant capacity expansions in the next 12 months. Once you decide on that, how long do those capacity expansions take to build?
And what does this mean for revenue and order growth, as we kind of look here in the medium term over the next several quarters?
Samuel Thomas
Well, we've demonstrated over the last couple of years that we have the capability to grow our business in China between 50% and 100% in the year. I don't think we've lost that capability.
Chase Jacobson - William Blair
And I think a similar question on the E&C business. The revenue growth came down quite a bit this quarter, is that because of the low and awards in the second part of 2012 or is that because of capacity?
And when we think about the ethylene orders or the order that you had this quarter, should we think of that the timing of that as similar to the large LNG orders that you've had in the past?
Michael Biehl
Well, that's more timing in this quarter, Chase. We have right now the large scale LNG projects coming through out of backlog into revenue this year.
So lot of it is timing. The customer is depending upon their schedule and when we can move it out of revenue into backlogs and move it forward, so that's what's rolling through now.
It's always hard to predict when it's going to come true and we try and do that, but we're not always on target. So it can go up or down each quarter, in this year particular, because some of those large scale projects are rolling through for the Wheatstone and specific APLNG that we are currently in the process of building out.
And some of the smaller scale orders move certainly through out of backlog and direct revenues much quicker.
Operator
Our next question comes from the line of Jeff Osborne from Stifel.
Jeff Osborne - Stifel
Most of the things have been answered, but just two quick ones here. On PetroChina, obviously, a nice string of orders here, is their plan for them to give you kind of a rolling six month forecast because you've now had three or four quarters in a row of consistent orders or what would be the rationale of not doing like some, kind of, broader framework agreement and having a longer-term deal in place?
Samuel Thomas
There is lots of possibilities under discussions. I would view it as there are 13 operating oilfields or operating divisions within PetroChina.
We've had larger words from or significant sales to three of those operating division. We're doing our best to become a favorite supplier as the other operating divisions commenced their rollout of LNG infrastructure.
Jeff Osborne - Stifel
And I assume what PetroChina had no issue on in terms of credit availability for them. They are using a broader credit impact in China with either PetroChina or any other potential customer?
Samuel Thomas
I think if you look at the balance sheet of PetroChina and the PRC, there is not a lot to worry about.
Jeff Osborne - Stifel
Last question for you. How do we think about the margin trajectory in 2014, in particular as the La Crosse capacity comes on with the E&C division in particular?
Is there any kind of teething pains that we should consider in that the first half of the year or throughout the year?
Samuel Thomas
There is always an issue that we worry about a lot internally. I think that some, from the 20,000 foot level, it may cause small variance in the gross margin.
But we've done this before. I think we've got a very good plan for ramping that capacity up.
So I feel confident we'll do a good job.
Operator
Our next question comes from the line of Martin Malloy from Johnson Rice.
Martin Malloy - Johnson Rice
Could you talk a little bit maybe about the product lines that you have, that you feel most confident about in terms of your competitive position, whether from a technology standpoint or relationships with customers?
Samuel Thomas
I think that we put extraordinary effort across all of our product lines into continuing to differentiate them. And for anyone who has followed Chart, you will see that the current product in favor or market in favor changes fairly dynamically overtime.
And I think that the focus of everyone here at Chart is continuing to improve our product offering, our service to customers across the full range of our products. And the reason we've been able to grow the business successfully is that when the opportunities come up, Chart gets the call and Chart wins the order, because we're continually doing that.
So I don't think there are any products, in particular, which I would single out as being the ones that drive our results. And we've been working across a broad front.
And when we see a market that we think is going to be attractive, we work very hard to have lots of product variants that can service the needs of that market.
Operator
Our next question comes from the line of Chapman Deng from JPMorgan.
Chapman Deng - JPMorgan
I have got a couple of questions. First is actually to chat on the China growth outlook.
You mentioned that you expect 50% to 100% growth in China revenue. May I confirm, is it for 2013 target or is that a medium-term target?
That's the first question. The second question is actually regarding the capacity in China.
May I know your LNG refilling station capacity as well as LNG tanks, fuel tanks capacity, manufacturing capacity in China right now? And the follow-up question is actually on your capacity addition plans in China.
Samuel Thomas
In terms of that forecast, whether it was 2013 or medium-term, it's certainly what we will experience in 2013, and it's also what I would expect to achieve in the medium-term. In terms of what we're going to add in the way of capacity, those plans are still under discussion.
They haven't been announced, but I would anticipate us moving forward to effectively double our capacity or increase our capacity by at least a 100% in China. In terms of specific capacity for our products, virtually all of our products aimed at the LNG market, while slightly different in terms of timing, are undergoing capacity expansions that enable us to meet that forecast of 50% to 100% growth per year over the medium-term.
And I think we've demonstrated that we can do that.
Operator
Our next question comes from the line of Tom Nowak from Advent Capital.
Tom Nowak - Advent Capital
Just regarding LNG into the drilling and fracking market, can you may be share a little bit more about what you're seeing and how big this market could be? And specifically is there capacity constraint right now in terms of available rigs and fracs spreads that can actually utilize LNG?
Is that what the bottleneck is?
Samuel Thomas
I don't know that I would term it the bottleneck. There has been equipments certainly for drilling.
There has been equipment converted and there has opportunities to convert more. That market has seen lots of change going on, so it's a matter where do they allocate their resources to make the changes.
That's challenging for us to forecast exactly the pace in which that goes forward. In the case of fracking rigs, there is a higher consumption associated with fracking and there is some equipment development going on, both on our part and on the part of E&P companies and the service providers to come up with the most effective and reliable means of making all that fuel available.
Tom Nowak - Advent Capital
Is it competing against field gas, is that part of the issue?
Samuel Thomas
There is the trade-off with field gas. We have some understanding and it's not clear to everyone, us included, what percentage you run rigs and frac spreads on field gas as opposed to LNG.
That the range of estimates that I've seen, I've talked about field gas being anywhere from 25% of the market to 70% of the market, with the balance taken up by LNG. It's going to be very much field specific as to whether you can use field gas or field gas economics versus LNG, also going to determined by the availability of liquid.
Tom Nowak - Advent Capital
So it sounds like the industry is still trying to figure out both the technology and the economics. Is that fair?
Samuel Thomas
Yes. And I would say in terms of technology, it's the normal trial and error process that gets used in it as to what works most effectively.
Tom Nowak - Advent Capital
I mean, are the frac spreads and rigs that can utilize LNG? And are they somewhat first generation or they basically being modified existing rigs?
Samuel Thomas
Both.
Operator
Thank you. And at this time, I'm not showing any further questions.
I would now like to turn the call back over to Sam Thomas.
Samuel Thomas
Okay. Thanks very much everybody.
As you can sense from the questions and the responses to the question, we've got a pretty exciting growth opportunity. As we see acceleration of LNG infrastructure opportunities in Asia, followed closely by North America and increasingly other areas of the world.
We're also benefiting from increased use of natural gas and natural gas liquids at every step of the value chain on a global basis. We will continue to invest in our people, organization and physical capacity to be well positioned to execute of what we consider to being an exceptional opportunity.
Chart has a bright future. And we're all excited to be part of building the company that will deliver on that future.
Thanks very much for listening today. Goodbye.
Operator
Ladies and gentlemen, thank you for participating on today's conference. This does conclude the program.
And you may all disconnect. Everyone have a great day.