Feb 24, 2015
Executives
Michael Biehl - VP & CFO Sam Thomas - President & CEO
Analysts
Jeff Spittel - Clarkson Capital Noah Kaye - Northland Capital Markets Eric Stine - Craig-Hallum Chase Jacobson - William Blair Rob Norfleet - Alembic Rob Brown - Lake Street Capital Martin Malloy - Johnson Rice Tom Hayes - Northcoast Research Greg McKinley - Dougherty Walter Liptak - Global Hunter Securities Pavel Molchanov - Raymond James Alex Potter - Piper Jaffray
Operator
Welcome to the Chart Industries Inc. 2014 Fourth Quarter and Year-End 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 Tuesday March 3.
The replay information is contained in the company's earnings release. Before we begin, the company would like to remind you that statements made during this call that are not historical in fact are forward-looking statements.
Forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied in the forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the information regarding forward-looking statements and risk factors included in the company's earnings release and latest filings with the SEC.
These filings are available through the investor relations section of the company's website or through the SEC website, www.sec.gov. The company undertakes no obligation to update publicly or revise any forward-looking statement.
I would now like to turn the conference call over to Mr. Michael Biehl, Chart Industries' Executive Vice President and CFO.
You may begin your conference.
Michael Biehl
Thank you, Nicholas. Good morning, everyone.
I would like to thank you all for joining us today. I'll begin by giving you a brief overview of our fourth quarter and year-end results and then Sam Thomas will provide comments on current market and order trends we see in each of our business segments.
I'll then finish up by commenting on our outlook for 2015. Fourth Quarter 2014 net income was $26.9 million or $0.88 per diluted share, as compares to fourth quarter 2013 net income of $23.2 million or $0.71 per diluted share.
Net income for the year 2014 was $81.9 million or $2.67 per diluted share. This compares to net income of $83.2 million or $2.60 per diluted share for the year 2013.
Sales for the quarter were $326 million, a 7% increase from the prior-year quarter. Improved project volume and execution in energy and chemicals and strong distribution of storage industrial gas sales were partially offset by a decline in biomedical respiratory therapy sales and D&S LNG sales in both the U.S.
and China. Our gross profit for the quarter was $96.9 million or 29.7% of sales, compared with $93.8 million or 30.9% of sales a year ago.
Orders received in the fourth quarter totaled $251.7 million. We're down 29% sequentially as the third quarter of 2014 included three major orders totaling over $80 million.
Orders in backlog were reduced in the fourth quarter of 2014 by $33 million, to address adjustments in the distribution and storage China backlog. These orders, which were primarily received before 2014, were impacted by recent regulatory changes in China or other circumstances indicating the customers were unlikely to fulfill their obligations.
As a result, reported net orders for the fourth quarter of 2014 were $218.5 million including this $33 million reduction. In the E&C business Fourth Quarter sales increased 40% to $110 million compared to the prior-year quarter, due to additional project volume and improved execution on LNG liquefaction and petrochemical applications.
Gross margins were 30.2% compared with 30% in the prior-year quarter. It should be noted that several brazed aluminum heat exchanger emergency short lead time projects contributed 3% to E&C's gross margin in the current quarter and 4.5% in the prior-year quarter.
Excluding the emergency projects, underlying margins did improve almost 2% due to volume and improved execution. In our D&S business fourth quarter sales decreased 2% year over year to $160 million.
Reduced demand for LNG applications in China and lower European results due to currency translation, were mostly offset by improved packaged gas sales for industrial gas applications. Gross margins for D&S declined to an unusually low 24.7 compared with 28.8% a year ago, driven by global sales and product mix differences as well as unfavorable currency impacts.
Sales on our biomedical business declined 8% to $56 million compared to the prior-year quarter. The respiratory therapy segment accounted for the shortfall as a result of currency competitive pricing and AirSep warranty.
Biomedical gross profit margin improved to 43.1% in the quarter, compared to 37.7% for the same period in 2013, as a result of a $5 million escrow settlement related to excess warranty costs for AirSep oxygen concentrators. This settlement partially offset higher-than-expected AirSep warranty expense incurred during 2014.
Product enhancements implemented to address the warranty issues related to these concentrators are expected to lower future warranty costs. Furthermore, we continue to pursue additional recovery from a representation and warranty insurance policy associated with the acquisition for higher-than-anticipated warranty expense and other matters beyond the $5 million recovered in 2014 from the escrow.
Excluding the escrow settlement, biomedical margins would have been 34.2%, which is lower compared to the prior-year quarter as a result of lower respiratory volume and the impact of currency, as a significant portion of biomedical sales are in euros. SG&A expense for the quarter was $50.8 million, up $1.3 million from the same quarter a year ago.
The increase was largely due to higher employee-related variable short-term incentive compensation costs. SG&A as a percentage of sales improved to 15.6% from 16.3% last year, at higher revenues in the current quarter.
Income tax expense was $9.9 million for the fourth quarter and represented an effective tax rate of 26.7%, compared with an effective tax rate of 27.5% in the prior-year quarter. The Fourth Quarter 2014 tax rate was lower than the prior-year quarter due to the tax extenders package signed at the end of 2004, which allowed Chart to recognize the benefit of its R&D tax credits.
Finally, as we generated a significant amount of cash from operations during 2014, we were able to pay off the remaining $66 million on our revolving credit facility, which represented the former term loan when we refinanced our senior credit facility at the end of October 2014. Therefore, we have no outstanding borrowings on a revolving credit facility, increasing our availability in this facility to $416 million and improving our liquidity as we move into 2015.
Our balance sheet is solid, giving us substantial financial flexibility for operating as well as strategic opportunities. I'll now turn the call over to Sam Thomas.
Sam Thomas
Thank you, Michael and good morning, everyone. Our strong Fourth Quarter results demonstrate our ability to execute on LNG liquefaction and petrochemical projects in E&C and a continued strength in our global D&S industrial gas business.
Over the past 90 days, we've implemented cost reduction actions approaching $20 million; this includes a head count reduction of approximately 5% of our global work force. We've addressed variable compensation costs for 2015 and limited wage increases.
As we move through 2015, we'll closely monitor our end markets and order rates and we'll continue to take appropriate and timely actions as necessary. We have previously demonstrated our ability to successfully manage and execute through cyclic downturns with a focus on cost-cutting and operations excellence.
As an example, in the 2008-2009 timeframe we cut costs by over $30 million including a 25% reduction in headcount, or 800 employees company-wide. 2015 is going to be a challenging year for Chart.
We expect growth in our industrial gas and biomedical markets and have significant LNG liquefaction and distribution opportunities that could be larger than any Chart has captured in the past. However, we face deteriorating near-term business prospects in the D&S LNG business for applications based on diesel fuel replacement and within E&C for petrochemical and natural gas processing applications.
We anticipate that the strength of the U.S. dollar and increased competition will compress E&C pricing and margins and at the same time, currency will impact the value of our European results in dollar terms.
In China we see LNG equipment demand growing as the market adjusts to new emission requirements and the government continues to pursue its goal of improving air quality. However, oil prices below $60 are impacting progress on that front, as the government debates both market and government taxes and incentives to establish a clear spread between LNG and diesel pricing.
Our growth premise and subsequent ramp-up of capital spending in growth and SG&A over the past years had been based on substantially higher oil prices. Current oil prices depressed or postponed investment decisions and have not yet been fully reflected in our customers' forecasts.
We'll continue to focus on operations excellence, improve our cost structure during this retrenchment and focus on serving customers. We expect to be fully prepared for growth and an improved market position as oil prices recover and the growth of natural gas continues globally.
Finally, we have been through these cycles in the past and we have executed well. We have a diversified product portfolio that will provide the necessary profit and cash flows as we move forward.
We have a solid balance sheet and significant liquidity to fund our business and continue investment in manufacturing capacity as needed to achieve growth, once the cycle turns. Let me now comment on specific highlights for each of our businesses.
Within our energy and chemicals business we booked $71 million in orders during the fourth quarter, which is down sequentially from third-quarter orders. As a reminder, third-quarter orders in E&C included previously-announced FortisBC LNG liquefaction plant, a Black & Veatch Golar LNG, floating LNG project and the Sasol ethane cracker totaling in excess of $80 million.
I'm particularly pleased to report that the 100,000 gallon-per-day LNG liquefier we just delivered to Stabilis in 2014 is currently undergoing its start-up. This liquefier, the first of the standard LNG plants that Chart introduced, will provide LNG for high-horsepower applications that still benefit from the lower costs and emission benefits that LNG affords versus diesel.
We expect the Noble and LNG Holding standard plant liquefiers to also be up and running later this year. As I mentioned earlier, we remain encouraged by the continued interest and quoting activity for small- to mid-scale LNG liquefaction and larger multi-train liquefaction for LNG export facilities here in North America.
We're actively engaged in a number of feed studies for projects that will employ Chart's IPSMR liquefaction process and proprietary equipment. These projects including Parallax, Live Oak LNG and Venture Global LNG, both of which have been announced by those companies, still have to through various regulatory approvals and ultimately a final investment decision before Chart would receive orders for equipment.
Hence, while circumspect with regard to the impact of oil prices on investment decisions, we're cautiously optimistic that equipment orders will be forthcoming. Within distribution and storage we received orders of $129 million in the fourth quarter, excluding the impact of the $33 million backlog adjustment that Michael discussed.
This is down 18% sequentially, primarily due to lower LNG equipment orders for diesel displacement applications in light of lower oil prices. Global industrial gas activity remained consistent with expectations and should continue to grow in 2015, based on recent trends and major customer forecasts.
North America's seasonal slow-down was offset by growth in Europe, while Asia was flat in the fourth quarter. Industrial gas sales have been effectively flat for a few years.
But with improving industrial production growth and general benefit to the economy from lower energy prices, we expect an increase in demand. From an LNG perspective within D&S, orders have slowed but opportunities still exist, even in the face of a narrow diesel to LNG price spread.
We're quoting significant opportunities for distribution equipment that could result in orders during late 2015 or 2016. This includes ISO containers for transport on rail cars and ships, in addition to other equipment used in the virtual pipeline.
We're seeing developing opportunities for LNG gasification systems on a global basis, but particularly in South America. This is an exciting LNG opportunity and a growing geographic market for Chart.
As I mentioned earlier, we see strength in industrial gas applications globally as we move forward into 2015, particularly for packaged gas products where we offer solutions, which improve customer quality and reduce distribution costs. Moving on to biomedical, orders of $52 million were up slightly as both respiratory and life sciences, improved over the third quarter, while commercial oxygen systems were down, as environmental application project timing is lumpy.
It appears that respiratory therapy demand has started to stabilize, as orders and revenues have for the third and fourth quarter of 2014. While we expect demand to be fairly flat in 2015, we're expecting to see some growth in the second half as we penetrate the China market.
As Michael indicated, we're going to see currency headwinds for European demand, but we're encouraged by the underlying organic trends. Life science applications continued to improve as we benefit from the partnerships we've established with Thermo Fisher and Brooks Automation.
With increased disease research and new innovative products, we expect growth in 2015. Finally we have set the stage for our commercial oxygen system applications to grow in 2015, with improved product lead times and an external customer financing option for waste water applications.
Michael will now provide our outlook for 2015.
Michael Biehl
Thanks, Sam. We enter 2015 with $640 million in backlog.
And as Sam has mentioned, we're facing uncertainty across several markets we serve. Macroeconomic concerns, currency and the reduction in oil price are expected to impact our results for 2015.
We anticipate growth in the industrial gas, healthcare, life sciences and environmental industries we serve. However, competition is increasing in natural gas processing and petrochemical applications that will compress our margins.
As Sam indicated, we will continue to focus on operational improvements and cost reduction initiatives as we face this uncertainty. I think it's also important to further detail the impact currency is having on our business, although our local results have been solid in Europe.
Given our euro exposure and the strength of the dollar, the translation impact is certainly affecting our business. In addition, the strong dollar is making us less competitive when we bid against those who have currency advantage, which is driving pricing down and will compress margins in the E&C.
However, our capacity expansion projects outside the U.S. should help to mitigate this impact.
Based on these factors, we expect sales for 2015 to be in a range of $1.05 billion to $1.2 billion. And diluted earnings per share are expected to be in the range of $1.60 to $2.10 per diluted share, at approximately 30.7 million weighted-average shares outstanding.
In addition, our earnings will be more weighted toward the second half, as it has been historically. This excludes any restructuring costs and potential dilution impact resulting from our convertible notes.
We currently estimate our capital expenditures for 2015 to be between $60 million and $70 million which includes approximately $50 million for our expansion in China. Additionally, we're estimating our income tax rate at 31% for 2015, as the U.S.
has not extended the research and development credits at this time. And we see a regional mix shift toward earnings in the U.S.
at a higher tax rate. I would now like to open it up for questions.
Nicholas, please provide instructions to the participants to be able to ask questions.
Operator
[Operator Instructions]. Jeff Spittel, Clarkson Capital.
Jeff Spittel
Maybe if we could start with -- appreciate that there are a lot of moving parts in terms of the bid pipeline for you guys. But as you look out at D&S and E&C for the balance of 2015, could you talk us through some of the swing factors or some of the things that might need to happen for book-to-bill ratios to approach or maybe even eclipse of one?
Sam Thomas
Sure. Within E&C, the areas that we think are most likely to deliver meaningful orders are, in fact, liquefaction projects either floating LNG for stranded gas fields around the world, but particularly Africa and some South American opportunities and more importantly, a number of potential LNG export projects where they are using multi-trains of nominally 1 million tons, or in some cases, 2 million tons per train to achieve base load.
Those projects are being sold to off-takers or customers for primarily utilities in both Europe and Asia. And we're actively working on those projects, trying to get them or participating in getting them, to DOE approval and with signed off-take agreements.
Those could actually swing the balance, as you have indicated, from a decreasing backlog to a book-to-ship ratio above 1. Within D&S, we have a backdrop of improving industrial gas demand, which in previous up cycles, have exhibited 15% to as much as 20% growth.
We didn't see that kind of growth engine in the 2008-2009 to 2014 recovery. And frankly, currently the projected industrial production growth rates around the world don't support it going to that, but certainly they support high single-digit growth rates.
Jeff Spittel
And maybe switching gears, Sam you referenced some potential gasification opportunities. I think we talked about those.
Could you just maybe give us a refresher on what the kit looks like you sell into those projects and maybe general order of magnitude of the dollar figure looks like for those?
Sam Thomas
Yes when we talk about coal gasification our primary product brazed heat exchanger is going into very large air separation plants. The challenge with those applications is that a combination, majority of them are in China.
You have just seen some publicity in the U.S. of a pullback in support in the U.S., for coal gasification, for a coal gasification project.
The challenge with that is a combination of low oil prices and particular low natural gas prices. Along with the concerns over air pollution and CO2 emissions, meaning those projects do not appear to be going forward quickly.
In China, there is a hiatus and I believe we'll have the wait for the next 5-year plan as it's rolled out over the next year to understand to what extent the Chinese will proceed with coal gasification plants. But I believe that 2015 will be a year of wait and see.
Operator
Our next question comes from the line of Noah Kaye with Northland Capital Markets. Your line is now open.
Please proceed with your question.
Noah Kaye
The first question you are talking about a $50 million CapEx allocation for China expansion this year, can you give us a little additional color on that allocation spend? Where it's going exactly?
Is it [inaudible]. Thank you.
Sam Thomas
Yes it's going it our new site or Greenfield site in Changzhou, our buildings on the site are roughly 80% complete. The $50 million will go to finishing those buildings and also to purchase production equipment for both LNG and industrial gas applications.
The initial products that will be started up, primarily in the third and fourth quarter will be LNG vehicle tanks. It will also be capacity allocated to production of ISO containers and the capacity also has the flexibility to produce any range of our products.
Our other area is our package gas or perma-cyls for his LNG apartment block or process heating.
Noah Kaye
Could you sort of help us understand a little bit more on the reduction in that in that VNS [ph] backlog for China? I believe in the past you said you had $100 million or more of backlog with at least one major customer for that market.
So how should we understand the specific amount of reduction? What exactly happened to cause you to reduce it?
And what's your view on kind of the rest of that backlog, you know, rolling out?
Sam Thomas
The reduction in backlog is the result of a thorough scrub of the existing backlog because as you know, we booked many of these orders in 2014 and it went through a period with relatively few customer deliveries. Some of the products, the majority were not started, but some were finished and sat in backlog.
Nearly 70% of the cancellations were due to regulation changes related to transport licenses for mobile equipment. In addition there were a number of them for intermodal containers or portable self-contained fuel stations where there were no government standards in 2014 and customers decided not to proceed when they realized that the space requirements and set become requirements of the government standards, which were implemented during 2014.
Of the total $33 million, roughly 10% of that was related to the impact of these regulations on the one large customer, PetroChina. The balance of the backlog has been confirmed by them and we've received assurances from them that a majority of that backlog will be shipped during 2015.
Operator
Our next question comes from the line of Eric Stine with Craig-Hallum. Your line is now open.
Please proceed with your question.
Eric Stine
Maybe just given what's going on in the market I know the EPS guidance range is wider than typical maybe can you just talk about some of your assumptions, oil, FX or some of the larger opportunities? I guess you just spoke to PetroChina but some of the other opportunities that get you to the low end or to the high-end?
Or we should think about that?
Michael Biehl
In terms of currency, Eric, in the current quarter, our sales were about $4.5 million lower, margin was about $2 million lower. Impact related to currency.
Going into 2015, you know, based upon where the current rate is at, compared to the prior year, our sales are down $25 million to $30 million, you know, going into this year and between $0.21 and $0.26 per share as a result of that decline in currency, compared to 2014.
Sam Thomas
And going back to the majority of the spread and range and our uncertainty is related to the impact of the reduced spread between crude or particularly diesel and LNG. As you know, in many markets, that spread has gone to a very small number, particularly North America.
In China, it's also gone to a smaller number extending paybacks, but the government is intervening and there's talk of more intervention both from the standpoint of raising they have raised and are talking about additional increases in pies tax on diesel as well as discussion as well as import prices for LNG come down dramatically on the crude cocktail pricing formula, as to whether the Chinese government will adjust prices for domestic natural gas, which would also impact the domestic liquefaction. Those probably create the greatest uncertainty.
And it's not, it's really a matter of timing, as to how the market comes back when these price spreads and future price spreads resulted in orders to us. Certainly depressed at the moment as people are absorbing, but we expect it to improve the prospects that we're counting on, to underpin our forecast are in the LNG area, are those customers what are taking the long-term view to oil and natural gas pricing and also have the balance sheet or the equity ability to go forward in otherwise unfavorable short-term environment.
Eric Stine
Okay. But it sounds like in terms of projects in backlog or business in backlog, that you are assuming that a fair amount of PetroChina that does occur in 2015?
Sam Thomas
Yes. I should say at least 50% of the backlog is executed in 2015.
Eric Stine
Maybe just turning, just curious if you can provide any clarity on the current quarter? And without necessarily specifics, but what the orders look like, I mean clearly things have deteriorated since the end of the year and this is how we should think about it when comparing the two.
Sam Thomas
First quarter is traditionally very weak. It's the time we consider whether we should slash our wrists or not on an annual basis.
This year is consistent with that.
Eric Stine
Okay. But now, consistent with that, but I mean, you are not seeing, you are not seeing fair to say a dramatic deterioration and or it is kind of just normal in the context of the current market environment but normal seasonality?
Sam Thomas
I think our comments about those markets that we show showing growth in 2015 have produced orders consistent with that. Those markets that we have said we expect to be challenged have been challenging in the first quarter.
I think that as we weapon through our budgeting process, starting in October and finalizing just a few weeks ago, we saw a, we had questions about the level of demand, which customers responded very positively in November time frame that they didn't see any issues. We’re a bit more circumspect in December and more negative in February.
So the impact of lower oil prices spreading through to natural gas applications has taken time, is taking time for it to be absorbed. And the sentiments have become more negative over that time period.
It's difficult to predict at what point you get a reversal of sentiment, but I would say that it's currently still becoming more negative.
Operator
Our next question comes from the line of Chase Jacobson with William Blair. Your line is now open.
Please proceed with your question.
Chase Jacobson
So I guess a question on the cost savings plan here. You mentioned that you had been doing it for about nine days now, that you are targeting $20 million in savings.
Can you give us some idea of how far along you are in that you know, what kind of savings you are accounting for in your guidance for 2015? You know, $20 million is pretty meaningful.
And also, what are the costs associated with that?
Sam Thomas
The first the savings are savings that already had been acted upon, whether they are announcing and moving forward with layoffs, or, in the case of other costs, they are costs that were budgeted and consistent with expenses we had in 2014, which have been eliminated or deferred for 2015. We're obviously executing on varying levels of back logs in our business.
We're not reducing headcount or production capability or customer service capability in those businesses which are busy or have imminent strong prospects, where we're convinced that we're going to see a downturn in activity and don't have orders or backlog to execute, then we reduce headcount. In terms of other cost savings, it will go across the organization, based on our estimates of what the current opportunities are and what future opportunities are for each of our businesses if a case of SG&A activities for each of our support activities.
So I'm confident that we have the ability to run a flexible organization, we've got a management team and ploy ease who have grown up and in capital spending businesses which go through sick lick activity, we know how to do it.
Chase Jacobson
Okay. So there is no special restructuring costs or anything associated with this that we're going to see in the first quarter.
Sam Thomas
There are restructuring costs. I would say they're very minor in the first quarter, probably less than $1 million or $2 million.
Michael Biehl
Probably less than a million.
Chase Jacobson
Okay. My other question on the D&S margin, you know the revenue is stronger than we thought, you know I understand the currency headwinds.
But can you maybe can you give us some more color on how the mix impacted it and kind of what that means as we go forward for 2015? Because the margin that was reported was you know, one of the lowest you know, that we have in our models going back.
Just any color you could give there would be really helpful.
Sam Thomas
Yes, there were a number of geographic and product mix issues in that of significant sales of relatively low margin product. Some of them were onetime events, some of them were products that we're on a, an increasing production trajectory, but need to get volumes higher before gross margins come to a reasonable level.
We highlighted it as unusually le, because we think that a significant part of that shortfall from traditional margins was specific to that quarter. However I'll temper that by saying that to the extent that we're running our factories at relatively low levels of utilization.
And with the reduction of orders, the global competition is intense that it may take a few quarts to get back to traditional D&S margins.
Operator
Our next question comes from the line of Rob Norfleet with Alembic. Your line is now open.
Please proceed with your question.
Rob Norfleet
I had a couple of quick questions. One on the large North American LNG projects or prospects that you all spoke of.
Can you discuss a little bit or give us some granularity as it relates around margins for those projects? As I go back and look at the original projects that we did in, not even in North America but the [inaudible] in LNG they were done on a very low margin.
And given that we're in a very competitive environment, I just want to try to understand how the bidding for those projects look and what type of E&C margins those projects would likely have?
Sam Thomas
Yes that's obviously a key interest to us, not something that I'm going to provide an enormous amount of color around. Except to say that in each of these projects, we're selling not just equipment but a process design and taking on process response.
So the margins are, I would expect to be slightly better than historic base load LNG facility orders. But perhaps not, not at the same level as, as the high level of E&C gross margin overall.
Rob Norfleet
I know you talked a lot about obviously the competition we're seeing in the markets and obviously that's driving price down. Can you maybe give us a little bit more you know, just a little bit more around what you're actually seeing in the E&C and D&S in terms of some foreign competitors that are coming in that are significantly undercutting on place.
Give us a sense of what the markets currently look like.
Sam Thomas
In the case of E&C on a global basis, the, a number of markets for brazed aluminum heat exchangers are depressed, cyclically depressed air separation applications. One market that was noticeably more robust than others was the natural gas processing in particularly Petro chemical applications for these exchangers and coal boxes in the U.S.
And we've seen significant price competition on what had previously been an area where we have had very high market share of non-U.S. manufacturers bidding on those projects.
And either or forcing us to take them at lower praises. In respect to D&S, as I've talked about, there's been relatively flat demand for D&S products, particularly bulk products for the industrial gas market and there's been reduced demand over the last few months for LNG bulk products, which has led to increased competition.
There are a couple of smaller U.S. players, European players, but also Chinese players, that are all competing on outside of their normal regions, although not on the same global extent as Chart does.
Rob Norfleet
And lastly, just on M&A, obviously they are you know, given the balance sheet strength you guys have, the availability in the revolver and the cash generation, I would think there is interesting opportunities given the turmoil in the markets. Can you kind of discuss how you are viewing M&A in 2015?
Sam Thomas
Yes. We view it positively and that this it be an opportunity in 2015 and 2016 to add bolt on acquisitions that would give us new products for a broader portfolio, close to the products we manufacture.
Or give us better regional coverage. We believe that as is reflected in our share price, the earnings multiples will come down.
It may take a bit more time for, for that to, for that sort of realism or multiple to get into the heads of sellers. But we're prepared and continuing to build a list of companies that we would like to have the opportunity to acquire.
Operator
Our next question comes from the line of Rob brown with Lake Street Capital Markets. Your line is now open.
Please proceed with your question.
Rob Brown
Could I just clarify the backlog? What is the backlog at PetroChina exists after you made your adjustments?
Michael Biehl
$93 million.
Rob Brown
And then just one more question on sort of visibility with oil you talked about things getting a bit more negative here. Do you think that's settled down?
Or do you still think the visibility in the oil related businesses is still, give us a sense of what you think the visibility is and how much that is still in place.
Sam Thomas
Given how poor I've done historically in forecasting Chart results, I don't think I have much of a career in forecasting oil prices. Having said that, I think that if oil prices, as oil prices recover to the levels that are forecast, by the experts, I think that the growth of natural gas as an energy source and the use of LNG for global trade to facilitate that will reassert themselves and it will be a, a growth business for us, going forward.
I don't think a likely outcome is that we'll have very low oil prices in perpetuity or that the use of LNG and the increased use of natural gas will go away. I also feel very good that we have the capacity and the capabilities we do, as we go through a consolidation, because I think that as demand comes back, Chart will be in a position to, without capacity constraints, to grow very rapidly and profitably into increasing markets.
Operator
Next question from the line of Martin Malloy with Johnson Rice. Your line is now open.
Please proceed with your question.
Martin Malloy
Just going back to the D&S opportunities that you talked about potentially materializing near then of this year in 2016, are those predominantly in China and dependent upon regulation and taxes?
Sam Thomas
They are not. They include opportunities in North America, in Europe and South America.
For and a large portion of them are for ship board transport of LNG, as diesel fuel replacement, sometimes for marine applications, sometimes for island power generation, as an example.
Martin Malloy
Okay. And then, as far as gas processing, you know, looking back to thirty and representing about half the E&C revenues, I believe, can you talk about what you are seeing out there in terms of the, demand for the, the heat exchanges for gas processing uses?
There has been a cup of cancellations in the press recently on gas processing facilities. I don't --
Sam Thomas
Yes. Our assumption, going back into early fourth, late third quarter, early fourth quarter, was that, that the number of gas processing opportunities, particularly in North America, which is a large part of the global demand, would diminish, because the, the growth of the liquids products, particularly ethane and propane, was out stripping demand.
We had a remarkable period through 2013 and 2014 that no matter how much propane was produced, it was a ready export market for it and ethane was not growing so quickly that conversions of crackers from nap that to ethane were absorbing a good part of it. As you know, in the third and particularly in the fourth quarter the prices for those NGLs collapsed.
And while the export market people are positive, long-term, that the propane can be absorbed and the folks producing ethane are fairly confident that there will be a significant demand uplift from the new ethylene crackers that are being built primarily on the Gulf Coast, we're still a time period away from that. And it does appear that, while we saw higher than expected border activity for natural gas processing applications in the fourth quarter and even as early as January, that there is a pull back in, in demand.
That started late January, early February that leads us to believe that there will be at least a six month hiatus on significant numbers of new natural gas projects. So we have plenty under discussion.
But it tends, it seems to be a period of wait and see and the low natural gas liquids and natural gas prices that are being maintained as we go through this cold snap probably indicates that that's at least a six month hiatus.
Operator
Your next question comes from the line of Tom Hayes with Northcoast Research. Your line is now open.
Please proceed with your question.
Tom Hayes
I can't just wanted to circle back on the expectations for the industrial gas business. Expectations are for growth from both the U.S.
and Europe. Is there expectations for one to be stronger than the other?
Sam Thomas
I'm happy for them to compete with one another and let us know. The, the industrial production growth forecasts or GDP growth would seem to favor the U.S.
economy. And we've seen good activity supporting that from our North American industrial gas customers, in the fourth quarter and early in the first quarter.
Those, the sales growth is focused toward those products, particularly our products that offer the efficiency for the industrial gas producers or distributors and also customer benefits in terms of product quality. So we're seeing that as a growth market.
Europe, while the overall European growth seems anemic, we do see more activity in Northern Europe and Central Europe. And I think there is also a belief that perhaps the levels of activity in Europe have been low for so long that there is a need for increased spending and an opportunity for increased spending despite the relatively anemic growth projections.
And one further comment about our European operation is that with the weakness of the euro and also the Czech koruna, we find we're able to compete in a wider range of markets, Middle East and South America, as an example.
Operator
Our next question comes from the line of Greg McKinley with Dougherty. Your line is now open.
Please proceed with your question.
Greg McKinley
Just a few follow up questions related to PetroChina. $93million in backlog.
Is it correct that none of that was, none of PetroChina, was recognized as revenue for 2014? Or roughly none?
Michael Biehl
About $12 million was recognized in 2014.
Greg McKinley
Okay. In terms of your China expansion project, is that entirely a D&S related investment?
Or is that going to combine some E&C capabilities as well?
Sam Thomas
It is a D&S investment.
Greg McKinley
Okay. And so, can you help me better understand -- obviously moving forward with an additional $50 million investment there, you feel like there is a fair amount of LNG or industrial gas-related activity to support that.
Does that really represent in 2015, just a build-out, but in 2016 is when we see -- 2016 or 2017 -- where we see utilization of that facility and margin ramping with overhead absorption? How should we think about how rapidly you think that facility gets used with the demand in China?
Sam Thomas
Our initial plan for the project was that it would be completed in 2014. With demand growing slower than planned back in 2013, we'll move forward with this project, we stretched out the investment through 2015.
So you are correct that we will be doing some production on that site in the second half of 2015, but that it will be a 2016 ramp-up. The China market, we're very confident in the long-term growth and use of LNG and in our products.
But one facet we have learned of the China market and of growth markets in general, is that the growth ramp-up is not linear. It is significant stair steps.
But in order to capitalize on that and be a significant participant, you have to have production capacity available for what would seem to be rather dramatic, compared to other parts of the world. And so that's what we're preparing for.
I would love to say that as a building is finished it will be operating at 100%. That's not the case.
But we're sufficiently confident and believe that it's a wise investment to have that production capability ready and to utilize it as it's ready.
Greg McKinley
And then the last two questions, with your cost reduction actions, can you help us understand what non-segment operating expenses are? I don't know if you call it corporate G&A, those unallocated operating expenses?
Where are we at from an annual run rate basis? That would be question number one.
And then secondly, in the E&C segment you talked about competitive pressures, maybe on margins. You also have some extra capacity in Wisconsin.
How should we think about your margin outlook there? And does it change at all during the course of the year?
Sam Thomas
There is not much that's going to stay constant in 2015, Greg. There is a lot of moving parts.
Many of those plans and where we'll come up, while we've taken immediate action on what was obvious, our plans going forward, are developing and will be fleshed out significantly in the coming months.
Operator
Our next question comes from the line of Walter Liptak with Global Hunter Securities. Your line is now open.
Please proceed with your question.
Walter Liptak
I wanted to ask a clarifying question on the guidance, the $1.60 to $2.10 and make sure I understand what's in there. I assume most or part of the backlog is in there.
So I wonder how much you are expecting to ship. And then currency, we talked about that.
I'm sure that's in there, the $20 million in cost-out. How much orders do you need it take in still in 2015 to reach that range?
Sam Thomas
The upper end had an initial assumption of roughly $1.1 million to $1.15 million of orders. However, a significant portion of that would be for lead times longer than being delivered in 2015.
I think I would probably -- I don't have a precise answer for you, but I would say that something like 80% to 90% of biomed's order intake is assumed to occur in 2015. Something like 60% to 65% of D&S's order intake is assumed to occur in 2015.
And less than 20% of E&C's order intake is assumed to occur -- I'm sorry, it might be 25% of E&C's order intake is assumed to occur in 2015. So a substantial part of E&C's shipments this year are already in backlog.
Something like 50% of D&S's assumed shipments are in backlog and less than 10% of biomed's assumed shipments are in backlog currently.
Walter Liptak
And how much of the cost-out is assumed in your numbers?
Sam Thomas
The $20 million is assumed in the forecast. There are additional assumptions of the amount of cost that comes out based on the first two quarters' order intake.
Walter Liptak
And then, kind of along those lines, in the prepared statement, the release, you talked about the quote activity. And I wondered if you could help us characterize it, especially with the LNG liquefaction?
Are some of these quotes for very large projects, that when you get them they fill in the backlog for 2016-2017? Or is it a number, a historically high number, of smaller orders?
Sam Thomas
There are elements of both. There are multiple projects in LNG liquefaction that range from roughly $20 million per order to those that are in excess of $100 million and would provide multiple years of backlog or multiple years of execution, I should say.
Operator
We will move on to the next question which will come from the line of Pavel Molchanov with Raymond James. Your line is now open.
Please proceed with your question.
Pavel Molchanov
We've seen several U.S. jurisdictions put in pretty strong regulatory standards against gas flaring, beginning with North Dakota last summer and then the EPA rules taking effect this past month.
Are you noticing any uplift in demand for the small-scale liquefiers based on these regs?
Sam Thomas
There is lots of discussion regarding small-scale liquefaction. There are also challenges associated with it being cost effective for flare gas applications because of the challenges of providing cost-effective gas clean-up prior to liquefaction.
So I would say, yes, we're engaged in lots of discussions. No, we have not participated in significant sale of very small-scale LNG.
We have seen that a number of gas plants that were sold were intended to process the gas that has until recently been flared by collecting that gas, along with liquids and processing it at central facilities. We had the indication that some of the orders we received late in the fourth quarter were gas processing plants intended for those applications.
Pavel Molchanov
And then just one more on China. I know you don't give guidance on a geographic breakdown, but directionally, do you expect D&S revenue from the Chinese market to increase versus last year's levels?
Sam Thomas
Yes, we do. Although the, the level of uncertainty, due to current oil prices and what the Chinese government is going to do viv-a-vis excise taxes on diesel and pricing of gas, is unclear at the moment and will be unclear until at least a month or so post Chinese New Year holiday, which is just coming to a close.
Operator
Our next question comes from the line of Alex Potter with Piper Jaffray. Your line is now open.
Please proceed with your question.
Alex Potter
Question on gross margins for D&S and E&C. Summarizing things, your qualitative comments from earlier regarding competition capacity utilization 4X, et cetera, it sounds as though implied within guidance is some degree of degradation in gross margin for both of those segments.
Would you say that is a fair statement?
Sam Thomas
It is and that is directly reflected if you look at our 2014 results versus our 2015 forecast, where we're forecasting earnings down on a nominal decrease in sales, or flat sales.
Alex Potter
Okay. Yes, that's what I thought.
And then, also I know that in the past, you've spoken, at least on a full-year basis, regarding what LNG-related revenue is as a percent of total revenue in D&S and in E&C. Was wondering if you could give an update on what that percentage was in 2014 as a full year?
Sam Thomas
Yes, I don't have the numbers immediately at hand. Give me a moment.
I have seen them.
Alex Potter
One other question, while you're digging through that, is thoughts on share buybacks? That's all I've got.
Thanks, guys.
Sam Thomas
Thoughts on share buyback while I'm trying to get someone. Excuse me, I'm going to put you on mute for just a moment.
Alex Potter
Okay.
Sam Thomas
I apologize, Alex. We had the percentages stated in our 10-K.
I'm just trying to look them up for you. The active share buyback, the Board does consider unusual on an ongoing basis.
While we feel that, I would state broadly, that while we feel shares are currently undervalued, based on the medium-term prospects of Chart and certainly significantly undervalued, based on the long term prospects of Chart, we're concerned that our share price is very responsive to oil price. If oil price is driving the share price, then share price repurchases may not have the desired effect, or may be swept away by changes in oil price.
We've seen previously, in cycles of this sort, when there is oil price declines and recoveries, very rapid movement in our share price. And then, going back to your question of 2014 percentage of LNG, E&C and D&S combined, LNG sales were 30% of our total sales in 2014.
And I believe we're filing our 10-K tonight and there is more detail around that comparable to what we've historically provided.
Operator
Thank you. With no further questions in the queue, I would like to turn the call over to Sam Thomas for closing remarks.
Sam Thomas
Thank you, Nicholas. As I've said earlier, 2015 is a challenging year.
We all prefer to be operating in a business where growth is significant and opportunities seem imminent and we're producing growing earnings. We don't have that luxury.
We run and we have a group of experienced people who are used to running, a cyclic business on which we thought we had a very good growth platform with LNG. The pricing of oil has drawn that into question and caused a cyclic downturn.
But our balance sheet has been structured to enable us to do that and we have all the skills necessary to operate successfully through a downturn. Our focus is on continuing to serve our customers and provide them high value, to get our cost structure right so that we're not only prepared to operate profitably and generate cash in a downturn, but to respond very quickly to improvement in demand.
And we think that the demand growth for LNG-related applications will be significant for us. At the same time, we're going to maintain the capability to pursue our strategic growth initiatives, whether that means capacity expansion or bolt-on acquisitions.
So we plan to continue what we've been doing and be prepared to be able to serve customers extremely well, both through the downturn and through a subsequent cycle upward. Thank you very much for listening in today.
Goodbye.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect.
Have a good day, everyone.