Chart Industries' CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: Chart Industries, (GTLS)

Chart Industries, Inc. (NASDAQ:GTLS)

Q4 2012 Earnings Conference Call

February 28, 2013 10:30 ET

Executives

Michael Biehl - Executive Vice President and Chief Financial Officer

Sam Thomas - Chairman, President, and Chief Executive Officer

Analysts

Eric Stine - Craig-Hallum

Jeff Spittel - Global Hunter Securities

Rob Brown - Lake Street Capital

Chase Jacobson - William Blair

Greg McKinley - Dougherty

Jeff Osborne - Stifel

Randy Bhatia - Capital One Southcoast

Operator

Good morning and welcome to the Chart Industries Inc. 2012 Fourth Quarter and Year End Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. As a reminder, today’s call is being recorded.

You should have already received the company’s earnings release that was issued earlier this morning. If you have not received the release, you may access it by visiting Chart’s website at www.chartindustries.com. A telephone replay of today’s broadcast will be available following the conclusion of the call until Friday, March 8. 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 facts 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 statements.

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

Michael Biehl - Executive Vice President and Chief Financial Officer

Thank you, Karen. Good morning, everyone. I would like to thank you all for joining us today. I will begin by giving you a brief overview of our fourth quarter and year end results and Sam Thomas, our Chairman, President, and CEO will provide highlights from the 2012 and provide comments on current market and order trends we see in each of our business segments. I will then finish up then by commenting on our outlook for 2012.

Reported net income for the fourth quarter of 2012 of $20.8 million or $0.69 per diluted share, this includes restructuring cost of $4.5 million or $0.11 per diluted share associated with the company’s acquisition of AirSep in our BioMedical segment. Earnings per share for the fourth quarter of 2012 would have been $0.80 per diluted share excluding these items. This compares to fourth quarter 2011 net income of $8.4 million or $0.28 per diluted share. Fourth quarter 2011 earnings would have been $0.51 per share excluding $9.5 million to refinance and restructuring costs largely associated with the reduction in the company’s senior subordinated notes in the integration of acquisitions that our BioMedical under good distribution in storage segment.

For the year, net income was $71.3 million or $2.36 per diluted share compared to $44.1 million or $1.47 per diluted share for the year 2011. Net income for 2012 would have been $2.50 per diluted share excluding $5.9 million or $0.14 per diluted share of acquisition related costs. This represents 36% earnings growth over the adjusted earnings per share for 2011 which was $1.84 per diluted share excluding $15.7 million of refinancing and acquisition related costs. Sales for the quarter were $304 million represent an increase of 38% compared to net sales of $220 million a year ago. The improvement is associated with strong end market trends in our E&C and D&S segments, AirSep contributing approximately $32 million in sales in the fourth. Sales for the year were just over $1 million a new record for Chart, 28% improvement over 2011 sales of $795 million. Our gross profit for the quarter was $85.5 million or 28.1% of sales compared with $64 million or 29.1% of sales a year ago.

Overall improved product mix and better volumes in energy and chemical of E&C and distribution and storage or D&S were offset by lower volume and mix in our BioMedical business in addition to it’s shift and geographic mix in our D&S business. With respect to the E&C business sales increase 70% to $95 million in the fourth quarter due to increased revenue and significant systems and brazed aluminum heat exchanger projects coming out of backlog.

Gross margins for this business improved to 31% in the fourth quarter compared to 24.8% in the same quarter last year. Improved project mix, pricing and higher volume particularly in our brazed aluminum heat exchanger business contributed to the margin improvement. In addition several emergency short lead time projects have shipped during the fourth quarter of 2012 contributed 1.5% to E&C’s gross margin in the quarter.

In D&S fourth quarter sales increased 22% year-over-year to $139 million driven by growth in LNG equipment shipments especially in Asia. Gross margins for D&S improved 29.5% compared to 26.6% a year ago. Improved product mix, volume, pricing and lower material costs combined completely offset changes in geographic mix as China LNG sales accelerated. We expect our China LNG sales in 2013 to be at better margins than in 2012 as we reap efficiency gains following our plant capacity expansion there.

And our BioMedical business sales improved 41% to $70 million in the fourth quarter of 2012 compared with $50 million for the same quarter in 2011. This is primarily due to the AirSep acquisition which closed at the end of August. Additional revenue from AirSep offset lower overall sales in respiratory therapy, which are being pressured by continued weakness in Europe and the impact of Medicare audits of physicians and the delay we are now seeing what is the competitive bidding process in the U.S. BioMedical gross profit margin decrease to 21.5% in the quarter compared with 39.9% for the same period in 2011. The decrease is primarily due to lower volume, additional restructuring charges related to the AirSep acquisition and changes in product mix with lower margin oxygen concentrators representing a much larger share of sales.

SG&A expenses for the quarter were $48 million, up $12.8 million for the same quarter a year ago. The increase was largely due to the AirSep acquisition and additional employee related costs as we continue to grow the business. SG&A as a percentage of sales continued to decline to 15.8% compared to 16% in the prior year quarter and is expected to continue to decline as a percentage of sales in 2013. Net interest expense was $4 million for the fourth quarter which included $2.3 million of non-cash accretion expense associated with the company’s 2% seven year convertible notes. Therefore cast interest for the fourth quarter was just $1.7 million. Net cash interest expense for the fourth quarter of 2011 was $1.8 million. Income tax expense was $7.7 million for the fourth quarter and represented an effective tax rate of 26.7% compared with $2.7 million for the prior year’s fourth quarter upon effective tax rate of 24.8%. The full year effective tax rate for 2012 was 29.9% which compares to the 29.7% for 2011.

And I will turn the call to Sam Thomas.

Sam Thomas - Chairman, President, and Chief Executive Officer

Thank you, Michael and good morning everyone. We had a great finish to 2012, which as Michael mentioned was another record year for Chart eclipsing $1 million revenue threshold. A record year in the orders was highlighted by strong end market growth especially in LNG applications and natural gas processing, which is allowed us to launch major capacity expansion projects in both our E&C and D&S segment. The $40 million LNG equipment order from PetroChina that we announced today highlights our end market growth. And we are uniquely positioned to address additional opportunities like this as they developed. We believe our customers will continue to have growing LNG equipment needs and we plan to be in a position to meet that demand with high quality, safety, and timely delivery.

We closed the acquisition of AirSep and continue to work on integration of this acquisition. Although, current headwinds in Europe as well as Medicare audits of physicians coupled with the delay in announcing the winners in a competitive winning process are impacting the business. We still believe in the long-term BioMedical growth opportunity and AirSep strengthens our position in the respiratory market.

The credit for the outstanding results in 2012 those who are talented and hardworking employees. I would like to thank all of them for the reference and dedication to serving our customers with innovation, experience and performance. Let me comment on order levels in the fourth quarter and highlight each of our business segments. Within our energy and chemicals business, we booked $62 million of orders in the fourth quarter, up 10% sequentially. Orders were solid across our markets with the exception of softness in the gas compression market in the U.S. which has impacted our heat exchanger business.

Base demand in our systems business and for brazed aluminum heat exchanger remained strong especially for natural gas processing, ethane, and LPG recovery applications. We expect this to continue as global energy demand grows with natural gas processing or natural gas, the largest portion of that supply. Our brazed aluminum heat exchanger business continues to see strong order flow and had an especially strong December. The capacity expansion to add a fourth raising furnace at our La Crosse, Wisconsin facility is underway and is expected to ramp up during fourth quarter of 2014.

In addition, we are making incremental throughput expansions during 2013. We continue to make good progress on large projects already in backlog, which is what drove the E&C revenue growth this year or 2012. E&C is also benefiting from the LNG build out in China, supply immediate liquefaction equipment to drive LNG production there. With respect to distribution in storage, fourth quarter orders of $151 million represent 25% sequential growth and a new quarterly record for this group. Orders were especially strong in Asia, led by the $40 million of work from PetroChina to provide LNG transportable, sell contained fueling stations, storage tanks and vehicle tanks.

The LNG infrastructure build out in China continues to ramp as more engine choices on full production and LNG liquefaction capacity comes online. We believe our success in capturing orders is due to our experience in delivering quality solutions with available capacity across the entire value chain. In North America investments in LNG related applications remained at historically high levels. However, they are not accelerating a phase many had predicted. We believe it’s due to a couple of factors, first, Cummins have delayed their 12 liter LNG power truck engine launch in mid 2013. This release was originally anticipated in 2012.

Secondly, additional LNG liquefaction capacity is coming online at a slower phase than we anticipated early in 2012. That said the pure economics of switching to LNG, a cleaner, cheaper, and domestic energy source will continue to encourage market development. Our recent capacity unit additions and our plans for further expansion in 2013 will ensure the Chart remains well-positioned to deliver all these opportunities. The build out is moving forward and Chart plans to be as the lead of delivering leaded infrastructure equipment. The LNG growth story has been led by China and to lesser extent North America. We just recently the European Union announced an ambitious package of measures to ensure the build out of natural gas fueling stations across European ports and highways with common standards for their designed use. We expect this to provide additional opportunities for Chart in the future both for on-road applications and marine fueling infrastructure for River and open see vessels.

The long-term growth story for LNG has not diminished and the secular growth trend remains in tax. As we talked about in the past heavy-duty truck fueling is the near term opportunity for Chart in the next several years. But we also expect strong demand within the three to five year timeframe for LNG storage and use equipment in oil and gas, drilling, marine, rail and industrial applications. In our biomedical segment, orders for $65 million fourth quarter represented 15% sequential growth. This growth is attributable to the acquisition of AirSep, the integration of AirSep is progressing it gives us significant strategic advantages and it has added some key technology to our portfolio.

This acquisition extends BioMedical’s product offering into well established stationary concentrated line as well as high growth leading portable oxygen concentrators. We are focused on sales and marketing integration to leverage Charts global platform. The addition of commercial onsite oxygen generations for industrial application is an exciting growth opportunity for Chart and complementary to both our energy, chemicals and distribution and storage businesses. Overall the impact of Medicare orders of positions delays in competitively bidding process and budgetary concerns in the U.S. coupled with macroeconomic concern in Europe, continues to impact our biomedical business.

We did not expect this business to begin to recover until late in 2013, as the underlying needs our equipment as not diminished. We will continue to focus our efforts to expand geographically to develop and release new products and improve our operating performs. Michael will now provide you with our outlook for 2013.

Michael Biehl – Chief Financial Officer and Executive Vice President

Thanks, Sam. 2012 was another successful and record year for Chart we entered 2013 with substantial order backlog. Natural gas related sales provided significant growth during 2012 and we expect those opportunities to continue particularly in China and North America, but also to growing degree, elsewhere in the world including Europe. The modest growth experience in our industrial gas business in 2012 as expected to continue during 2013. Our biomedical business will continue to be impacted by a full European market, the implementation Medicare competitive bidding process in the U.S.

Based on our current backlog in order expectations, net sales for 2013 at sector to be in the range of 1.2 billion to 1.3 billion and diluted earnings per share expect to be in range of 290 to 330 per share based on approximately 30.3 million weighted average shares outstanding. Included in our 2013 earnings estimates are approximately $0.10 per diluted share, we anticipated restructuring charges. Primarily for retention expense associated with the recently completed AirSep acquisition. Excluding these charges, earnings would be expected to fall in the range of $3 to $3.40 per share. We expect the full year effective tax rate in a 31% range.

Given our expansion projects underway, we would expect capital expenditures of 70 million to 80 million during 2013. Largely for the brazed aluminum heat exchanger expansion across Wisconsin and the large tank manufacturing facility being constructed and our new Prairie Minnesota location.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Eric Stine from Craig-Hallum.

Sam Thomas

Good morning, Eric.

Eric Stine - Craig-Hallum

Hi, guys thanks for taking my questions. I am wondering if you can start on the PetroChina order the $40 million just maybe provide some context of how that compares to their activity that you’ve seen over the last few years. And there is more clarity into some of the other opportunities that you’ve referenced earlier going forward?

Sam Thomas

Okay. Our business with PetroChina has been growing steadily without serving a larger number of the various oil field operating regions that PetroChina operates in. We’ve probably sold upwards of $60 million worth of equipment to PetroChina over the past couple of years with that being a steady ramp. This particular order was notable and it size we’ve sold numbers of these same pieces of equipment to them earlier in 2012. And they’re forecasting continued growth and use one of the key features of this is that with PetroChina while we’ve built several large six stations a majority of the work initially is going into these relatively small transportable stations which are used to establish fleets or to establish fueling locations on the highway. Ultimately that will be replaced with permanent stations and these stations will be moved to new locations. So it’s pretty exciting and it’s a strong commitment as to the growth in China the economics of using LNG and the benefits to air quality are compelling. So it’s pretty exciting going forward. We expect this equipment to be delivered primarily in the next two quarters.

Eric Stine - Craig-Hallum

Okay. Are you seeing anything from you referenced to some additional opportunities whether it’s Sinopec or other companies in China?

Sam Thomas

We continue to work and expanding ourselves with all the various players in China with sales to virtually all of the players and discussions of expanding those sales with those players.

Eric Stine - Craig-Hallum

Okay that’s helpful. Maybe just quick on liquefaction I know it’s been strong. But maybe not as rapid as you would have thought last year I mean you still I think you’ve talked about expecting increased activity from some of the energy majors over the next 9 to 12 months is that do you change at all?

Sam Thomas

No, it hasn’t. That is still intact some of the early movers natural gas producers who we did a lot of work with on developing liquefaction projects have full back based on the collapse of natural gas prices and their own balance sheet challenges. We have seen the – the more broadly based energy majors with stronger balance sheets not as dramatically affected by natural gas pricing moving forward. But they tend to have more deliberate processes and it takes a little bit longer to get from concept through to purchase orders.

Eric Stine - Craig-Hallum

Okay, alright I guess we will look for that going forward. And let me just sneak in one more just on BioMed can you give us thoughts on the margins a little bit just how much of the restructuring hit the margin line and how we should think about margins there going through 2013. Thanks a lot.

Michael Biehl

About $1.9 million of it in 2012 at the cost of sales line and the remainder of that piece was about $2.5 million.

Sam Thomas

That hit SG&A in terms of looking forward it’s challenging time. We made a significant size acquisition for Chart in this space almost simultaneously with the significant market pull back in the U.S., there have been embarrassed about the timing of that. But we are also working diligently to sort it out. There were a number of factors that contributed to the gross margin decline and the speed and timing of our recovery to historic levels. So, little bit fuzzy right now because we don’t know how quickly the market will recover. But we are working diligently both on our cost base to improve margins as well as looking closely to make sure that we capture appropriate market share as the market recovers.

Operator

Thank you. And our next question comes from the line of Jeff Spittel from Global Hunter Securities.

Jeff Spittel - Global Hunter Securities

Thanks, good morning Sam and Michael.

Sam Thomas

Good morning, Jeff.

Michael Biehl

Good morning, Jeff.

Jeff Spittel - Global Hunter Securities

May be could we start off with the order prognosis for E&C may be you could rank order, what you see out there in terms of opportunities with regard to end use applications and is there anything in the 2013 pipeline potentially that’s a similar order of magnitude as we order that we just saw to that.

Sam Thomas

The PetroChina order was for distribution and storage, LNG equipment. In terms of orders of similar magnitude, we are working on and having our pipeline, a number of projects for ethylene production, PDAs or propane dehydrogenation projects in $15 million to $40 million range, there are several integrated natural gas processing coupled with nitrogen rejection units and there are a number of smaller or mid scale LNG liquefier opportunities, that are all in our pipeline expect to see orders for through the course of 2013, 2014, but I keep getting educated on being careful about predicting when orders will hit.

Jeff Spittel - Global Hunter Securities

Okay, that’s very encouraging though. And then I guess as we can shift gears from a modeling standpoint, the lot of moving parts, most of them, Sam pretty positive for both E&C and DNS, I know for E&C in particular we talked about low 30s being a pretty reasonable expectation of the gross margin front for 2013. Is that still what’s imply and is there anything we need to keep an eye on as in terms of the quarterly progression there.

Sam Thomas

Yeah, I mean it should be in the 29% to 30% range for E&C and some of it depends upon the type of projects that are rolling through or rolling out of backlog each quarter, which could have an impact on margin and as you saw in the fourth quarter, urgency orders that went on added 1.5% for this quarter. So, we have those periodically so, from a quarter standpoint, it’s pretty tough to predict that is going to be level across the year, is everybody seeing that it’s jumped around quite a bit.

Jeff Spittel - Global Hunter Securities

Okay. But can squeezing one more the – we’ve had a little bit about interest in LNG applications with conversions on drillings rigs in the United States. Have you seen any indications of interest in that sort of technology?

Sam Thomas

Absolutely, we’ve been providing equipment for drill rigs both onsite degasification units which are large trailers with integrated equipment on it, so it take to supply those rigs and we are doing work and have a number of development projects should move that over to fracking, which tends to be significantly more energy intensive so you have to get more LNG in tighter space. Both of those seem very positive, active projects, active orders, potential for significant additional orders primarily North American based or exclusively a North American based at the moment, but we also expect to see that move outside the U.S. in a couple of years time.

Jeff Spittel - Global Hunter Securities

Sounds good, thank you gentlemen. Congrats on a nice quarter.

Sam Thomas

Thank you.

Operator

Thank you. And our next question comes from the line of Rob Brown from Lake Street Capital.

Rob Brown - Lake Street Capital

Good morning.

Michael Biehl

Good morning, Rob.

Sam Thomas

Good morning, Rob.

Rob Brown - Lake Street Capital

My question is on the European market you’ve talked about starting to see signs there. Could you give us a sense of how you see that market developing sort of what area sort of develop first? And then maybe a sense of how you’re positioning in the market I know your manufacturing capacity there but give us sense in that market position you have and how it will develop?

Sam Thomas

Okay. We have been a supplier of LNG storage, equipment storage systems marine transport bunkering solutions and other words both LNG tanks for our new ships particularly fairies as well as the dock side or key side refueling stations for them as well as the infrastructure to deliver fuel to them. Primarily in Scandinavia mostly in Norway, we continue to have a strong position, we’ve also sold a number of LNG municipal bus and truck refueling stations in both Western Europe as well as Poland we’ve had some participation increasing efforts for LNG fueling and in Spain, UK and Netherlands. The cost differential the economic driver in Europe because of their relatively high gas prices, natural gas prices has not been as compelling. However from the environmental side the commitment to clean energy is ramping up interest in Europe significantly because everyone discovering some of the hidden costs of other non fossil fuel green energy alternatives.

So, what we see happening is increasing commitment and work a lot of its being done as feasibility studies or early studies with orders to come for us and accelerating pace through 2013 and 2014. It is promising to note that we are working with virtually all of the – significant European trucks and marine engine manufacturers on LNG solutions for their equipment. There is perhaps accelerating even faster than in the U.S. and in China a development to use LNG and marine applications both for coastal shipping and for river transportation so I think that’s very positive. So I would put the overall European conversion at a couple of years behind the U.S. similarly to my positioning of the U.S. being a couple of years behind China. But this acceleration of the interest on marine applications and the historic lead of Europe and saying marine engineering standards could be in the Europe comes to the forefront within a couple of years on those particular heavy duty applications watch this base.

Rob Brown - Lake Street Capital

Okay good. And then on the DNS margins I think you’ve said they should sort of stabilize and maybe improve here. But could you give us a sense sort of how the DNS margins are looking 2013?

Sam Thomas

Rob, it should be sort of in the high 20s. Right now, China growing pretty rapidly during the year, which is at a lower margin, we should be able to balance that out with U.S. product. So but overall should average about 29% range.

Rob Brown - Lake Street Capital

Okay great thank you.

Operator

Thank you. And our next question comes from the line of Chase Jacobson from William Blair.

Chase Jacobson – William Blair

Hi, good morning.

Michael Biehl

Good morning.

Sam Thomas

Good morning.

Chase Jacobson – William Blair

Question on the large U.S. LNG projects that are out there it seems like lot of these projects their down Gulf Coast that have been propose making pretty good progress. And I think there is an increasing likely that will get some maybe get some non-FTA export licenses by the end of the year. It seems like that lines up pretty well at the timing of our new facility coming online. Can you just talk about your position on any of those projects?

Sam Thomas

We are involved in lots of discussions at various stages from additional clarities through to being closed hopefully closed to winning orders. All the announced projects, we are represented on both those processes, those projects and we have opportunities, on those projects which are announced as using the Conoco Phillips cascade process, if they are large scale LNG. We’ve also been a supplier to shell for their and then last modular movable liquefaction system, which they have recently announced have plan technology for the Elba Island, Savanna Georgia facility. So, overall I would say we have opportunities on roughly 50% of the projects that are announced but it’s a fluid situation. After remember the export licenses an applications because at the somewhat speculative process at the moment, far in advance of making doing full fee studies and commitments to technology and suppliers.

Chase Jacobson - William Blair

Great, okay. That’s very helpful. In terms of the competition on those projects, when you competitors also building a new facility. Is it more competitive and you would thought you think is it kind of like preferred partnership and preferred bidders on some of those?

Sam Thomas

There is the full spectrum.

Chase Jacobson – William Blair

Okay.

Sam Thomas

I think it’s fair to say that in this industry and then most industries as when people sense opportunities. There is plenty of competition about based on our historic success in winning orders and being represented and continuing to put effort into it and having what I believe is a good reputation in this industry. I think that will be well represented.

Chase Jacobson – William Blair

Okay and then just one more Michael you mentioned I think positive product mix in both E&C and DNS in the quarter. And I think it would have been the other way around the last couple quarters, give any numbers after the nexus within those segments?

Sam Thomas

There is an also a lot of moving…

Sam Thomas

Yeah, we don’t have…

Chase Jacobson – William Blair

Okay.

Sam Thomas

Too much color.

Michael Biehl

Exact numbers, but as you indicated says the mix was more favorable and part of that was more brazed aluminum in heat exchanger sales in 2013 fourth quarter and those are higher margin project and products.

Chase Jacobson – William Blair

Okay.

Michael Biehl

And then it seems within DNS but we’ve been successful at selling some of our proprietary products are more integrated systems, which have tended enable us to win higher margin. So, it’s very positive, it’s a trend that we’re working hard to extend.

Chase Jacobson – William Blair

Okay, I appreciated it color. Thanks a lot.

Operator

Thank you. And our next question comes from the line of Greg McKinley from Dougherty.

Greg McKinley – Dougherty

Yes, thank you. I was wondering if you could talk a little bit about your geographic revenue mix, Asia is obviously been leading the way with LNG. How would you compare Asia revenues in 2012 versus ’11 and given your outlook for ’13 where do you see that moving?

Sam Thomas

Our revenues, our product manufactured in China 2011 or 2012 versus 2011 were up some 60%, 65% and I would estimate that all the product shifting to China including that manufactured in either Europe or the U.S. We probably saw a 50% growth in sales to China, 2012, 2011.

Greg McKinley – Dougherty

Okay.

Sam Thomas

I would anticipate seeing a similar growth in 2013, you asked about the effect of that – of that mix while historically the gross margin we’ve achieved our project – products manufactured in China for the local China market. Having lower margins, we are working very hard at increasing the sales of proprietary or new products on which we are achieving margins comfortable to what we achieved in U.S. and Europe. So, we are hopeful we are going to continue to grow sales at a strong phase, but that we are also going to continue to improve our gross margin.

Greg McKinley – Dougherty

And on the margin front, what – how are – what is the attribute to these new products which makes them proprietary versus what other suppliers can provide in that market?

Sam Thomas

As many people experienced, as many companies experienced in China – our local Chinese competitors are very good at our products and offering them at lower prices with market penetration pricing strategies. We’ve been successful at introducing product like our orca LNG refueling stations, our modular lysed portable or transportable fueling stations that have been superior in performance safety and rehabilitee to that which are competitors have been able to copy. There are some patents associated with that. There is also significant know-how associated with that. We find to the extent that we are able to offer products which make the introduction of LNG safer and more reliable has gotten good market acceptance and so, we continue to invest to be able to enhance our product and meet specific market needs. We find that when we do that we are able not only doing orders, but to win orders at better markets.

Greg McKinley – Dougherty

Okay. Can you share with us in terms of your backlog mix right now? How you would I guess within E&C and DNS combined, how you might split that into your different end markets be at general energy, industrial, or LNG related applications and may be how that LNG slice to the phase changed from may be at this point a year ago?

Sam Thomas

Well, in terms of how much of our backlog is associated with energy compared to your 54% of sales that probably represent something like 75% to 80% of our backlog. Remember this project tend to be bigger and have longer lead times. In terms of how much of it is associated with LNG because there is a significant amount of natural gas processing or petrochemical projects in our backlog the LNG versus everything else mix would be something like 60% yeah something slightly over our sales to the energy.

Greg McKinley – Dougherty

Okay alright. Thank you.

Michael Biehl

Thanks Greg.

Sam Thomas

Thanks Greg.

Operator

Thank you. And our next question comes from the line of Jeff Osborne from Stifel.

Jeff Osborne - Stifel

Hi good morning. Just a couple of quick questions on my end here. Congratulations on the strong results. The – what are the lead times on the hit exchangers now you mentioned couple of rush orders in the fourth quarter. Have those come in it at all or did you folks just have some extra capacity?

Sam Thomas

We have been improving the throughput the output of the plant. Lead times are still out in the one year timeframe. We anticipate pulling that down over the course of this year and making the significant improvement in available capacity in the fourth and to be in the first quarter of 2014. In terms of having the ability and the open time to handle emergency replacements I think that those opportunities exist because there have been a number of cases where our existing backlog that we have not been the on the critical path for our customers and other words other components of their projects are actually slowing down their need for our product which opens up these times lots available to us to utilize for our short emergency work or two shift priority.

Jeff Osborne - Stifel

Got you. I think in the past.

Sam Thomas

It’s an occupational issue.

Jeff Osborne - Stifel

Right. I think in the past you – few quarters you’ve talked about 30% to 40% of the E&C mix coming from the larger chunk of projects I assume then with that commentary you just made that percentage was lower this quarter that’s bring up some of the capacity?

Sam Thomas

I don’t necessarily think it was lower it just sometimes juggling around different projects and if we can make a slot for these quick ships which are very attractive margins 70%, 80% gross margins we’ll make an attempt to do that.

Jeff Osborne - Stifel

Got you.

Sam Thomas

We have based upon the timing of one some of these large orders need to be delivered it gives us a little bit of flexibility that are not a lot, because where our capacity is currently have. But as we expand the capacity in ‘14 and we should be able to handling the more of…

Jeff Osborne - Stifel

And then switching gears to DNS side on the industrial gas business in particular you made some quite a bit of comments about Europe and response to your question. But in particular with that vertical I think you’ve highlighted there is an area of concern in recent quarters in particular with Europe. But just any general comments about the U.S. and the health of the U.S. and European industrial gas market for you folks?

Sam Thomas

Yeah, I think the general market view we get in Europe is that they are bouncing along the bottom. There is more optimism in Northern Europe, Germany, Scandinavia and Netherlands then there is and Italy and Spain. We’ve of course been able to utilize our capacity in Europe for industrial gas equipments globally. So we’ve exported more from Europe and been actually very helpful to us and providing better lead times and availability of product to our customers on a global basis. In terms of our Western European and Central European customers it’s bouncing along the bottom we’re not going off the edge of a cliff. But no rapid recovery forecast and very much a situation of Northern Europe or the Germen led economies seem to be much stronger than Southern European countries.

In terms of to the U.S. we have seen spotty demand up and down in our industrial gas business. We are seeing Cummins from our largest industrial gas customers of their forecasts going forward. But they are being cautious with capital spending. So, we are taking a very conservative view as to what as to how 2013 will unfold in the U.S. industrial gas business, but I would also say that we have capacity available to rapidly meet customer demand and we are working very closely with our customers to make sure we get every opportunity to do that.

Jeff Osborne - Stifel

Great to hear and I have two quick housekeeping ones for Mike what was depreciation in the quarter. And then also how do we think kind of OpEx trajectory in the second half ahead of the expansion of capacity that you folks have in Wisconsin and Minnesota, should we start ticking that up in Q3, Q4 ahead of those facility openings?

Michael Biehl

Regarding the later question in terms of the Wisconsin expansion that really won’t be up in running until the beginning in the fourth quarter of 2014, we’ll likely start taking orders as we get in the latter half of the year. New cranes will be really up in running by mid-year for those larger tank capacity. And the question on depreciation expense we have about $4.8 million of depreciation expense in the fourth quarter. And that compares to about $4.1 million for the prior quarter, and $17.4 million for the year and $14.5 for the prior year. That answers your questions?

Jeff Osborne - Stifel

That’s perfect. Thank you.

Operator

(Operator Instructions) Our next question comes from the line of Randy Bhatia from Capital One Southcoast.

Randy Bhatia - Capital One Southcoast

Hey guys, thanks for taking my question. I apologize if you gave this already but can you tell me what your 2013 BioMed margin assumption is embedded in your EPS guidance?

Sam Thomas

It’s in the low 30s, sort of low to mid 30s we think.

Randy Bhatia - Capital One Southcoast

So, no real change from the last quarter’s commentary.

Sam Thomas

No I mean, right now it’s now call it will depend on where the competitive bidding process goes and once they get it implemented the shake out in the industry in terms of suppliers. We would expect to see orders after that happens but right now our best sort of expectation is late in 2013. We will see that effect us in terms of additional orders in BioMed but it’s hard, it could come earlier but right now that not sure that will happen.

Randy Bhatia - Capital One Southcoast

And then there has been a lot of discussion on this call about the improvement in lead times specifically in E&C and I guess also in the D&S given the capacity expansions coming on line, what sort of efficiency gains can you guys realize in terms of orders and margins realistically once these – all these capacity expansions have hit their kind of run rate?

Michael Biehl

Well, an example it varies by product. As everyone knows, the actual margins we achieve are very much dependent on the competitive intensity and how much proprietary content we have. In terms of what we are looking for in efficiency improvements I think our recent experience in putting on a large chunk of capacity in China is indicative where we were able to achieve along with a lot of remanufacturing outputs something like a 20 to 25% improvement in productivity, now in this week China was starting from a lower base, but we are continually striving to significantly improve our productivity. These capacity additions are typically being done with increases in the level of automation and a significant focus on single piece flow, which are giving us very encouraging productivity improvements and the ability to have faster throughput in virtually all of our products. So, generally we are pretty positive about this and when we are making capacity expansion, it’s not simply a matter of we are going to add additional capacity and we’ll have the same cost base in the same throughput times. We are looking to make significant improvement in our capabilities when we do these.

Randy Bhatia - Capital One Southcoast

Alright, very helpful, I appreciate it. Thanks a lot.

Operator

Thank you. There are no further questions. I’ll now turn the call back to Sam Thomas for some concluding remarks.

Sam Thomas – Chairman, President and Chief Executive Officer

Thank you. As I said earlier, this is an exciting time for Chart. We have a lot of opportunities. We also have lots of challenges. With respect to our BioMed business where we had a disappointing quarter as part of the integration of AirSep and some real market headwinds, I think we still feel that, still feel very strongly that strategically we are positioning ourselves very well to be successful in an attractive respiratory therapy market. But we have more headwinds that we anticipated with the timing of our acquisition.

We are all focused on that and have our heads down to improve the operation of that business throughout and as the market recovers, which we know it well. We plan to be successful in growing our business there. So, we remained committed to the BioMed strategy and feel very confident that we can improve the operating results significantly. The LNG story is very exciting. But I think none of you have any elusions about the change of call and the timing of growing market when there are number of moving pieces.

We think that we have positioned and we’ll continue to position Chart to be a winner in this market growth. Having said that, we’ve recognized that we have to be extraordinarily flexible and adoptive to be customers’ requirements as they are developing and we’ve done that in the past and we feel very excited about the opportunities we are working on with both existing customers and perspective customers in our ability to convert that into real profitable business. So, thank you for participating in the call today and look forward to talking to you again soon. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may now disconnect. Everyone have a good day.

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