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Chart Industries, Inc. (NASDAQ:GTLS)

Q3 2012 Earnings Call

November 01, 2012, 10:30 am ET

Executives

Michael Biehl - EVP & CFO

Sam Thomas - Chairman, President & CEO

Analysts

Eric Stine - Craig-Hallum

Tom Hayes - Thompson Research Group

Rob Brown - Lake Street Capital Markets

Jagadish Iyer - Piper Jaffray

Chase Jacobson - William Blair

Mart Malloy - Johnson Rice

Greg McKinley - Dougherty & Company

Bill Priebe - Geneva Capital Management

Operator

Good morning and welcome to the Chart Industries Inc. 2012 Third Quarter Earnings 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, November 9th. 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 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 statement.

For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the information regarding forward-looking statements and risk factors included in the company’s earnings release, the latest filings with the SEC. These filings are available through the Investor Relations section of the company’s website or through the SEC website, www.sec.gov. The company undertakes no obligation to update publicly or revise any forward-looking statement.

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

Michael Biehl

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

Reported net income for the third quarter of 2012 of $18.5 million or $0.61 per diluted share; third quarter earnings would have been $0.66 per diluted share excluding $2 million of BioMedical acquisition related costs primarily related to the AirSep acquisition. This compares to third quarter of 2011 net income of $17.5 million or $0.59 per diluted share. Third quarter 2011 earnings would have been $0.62 per share excluding $1.2 million of restructuring costs associated with acquisitions.

Sales for the quarter were $254 million which represents a new quarterly record and an increase of 20% compared to net sales of $211 million a year ago. Despite slower growth in the global economy for the first nine months of 2012 versus the first nine months of 2011, Chart has been able to maintain a strong order backlog and capitalize on it and we expect to continue to profitably push record volumes to our facilities.

Our gross profit for the quarter was $78 million or 30.7% of sales compared with $66.6 million or 31.5% of sales a year ago. The slight decline is due to changes in product and project mix as well as currency effects.

With respect to energy and chemicals or the E&C business sales increased 44% to $83 million in the third quarter. We are making steady progress on several large base load LNG projects. Gross margins declined to 29.2% in the third quarter compared to 33.1% in the same quarter of last year. It’s important to note that in the third quarter of 2011, we sold some equipment that was previously written off, favorably impacted margins by about 3% in the prior year quarter. Excluding this item, margins were down only about 1% due to project mix.

In distribution and storage or the D&S business, sales increased 17% year-over-year to $117.8 million in the third quarter. Increase is attributed to higher shipments across a variety of product lines especially LNG applications.

Gross margins for D&S improved to 30.3% compared to 28.2% a year ago. Improved capacity utilization driven by higher volumes and a slight shift to higher margin product sales drove this improvement which was partially offset by higher than normal employee training costs, as we continue to ramp up several capacity expansion projects in D&S.

In our BioMedical business, sales improved slightly to $53.5 million in the third quarter of 2012, compared with $52.6 million for the same quarter in 2011. One month of activity from the AirSep acquisition which closed in August added $8.6 million of sales.

Respiratory product sales excluding AirSep were weak in the quarter, which can be attributed to very soft sales in Europe, a weak Euro and a negative impact from the phasing of Medicare competitive bidding process in the U.S.

BioMedical gross margins also declined for the year ago period from 36.2% down to 33.8%. Lower volume, currency effects on favorable mix in respiratory products did increased concentrated sales as well as AirSep related restructuring charges contributed to the weakness. We expect some AirSep acquisition related restructuring charges in the fourth quarter as well.

SG&A expenses for the quarter were $42.2 million, up $8 million from the same quarter a year ago. The increase is primarily due to AirSep and GOFA acquisitions, but also includes higher employee related expenses in our organic operations to support growth demand. SG&A as a percentage of sales was 16.6% compared to 16.2% in the prior year quarter.

Net interest expense was $4 million this includes $2.3 million of non cash accretion expense associated with the company’s convertible notes. Therefore, cash interest expense was $1.7 million for the current quarter. Interest expense was $2.4 million lower than the prior year quarter as a result of having our 2% convertible notes and now the repaid 9-1/8% senior subordinated notes outstanding concurrently for two months during the third quarter of 2011.

I’ll now turn the call over to Sam Thomas.

Sam Thomas

Thanks Michael and good morning everyone. First some overall comments; throughout 2012 we made it a priority to successfully execute on the sizeable order backlog we were able to build late last year and early this year. We are pleased to report record quarterly sales for the third quarter.

Despite pushing record volumes of products through our facilities we maintained our focus on profitable growth and strong cash flow generation. We are constantly looking at smart ways to use our existing capacity to exploit high growth, high return opportunities while trying to keep lead times competitive. We also continue to progress with new capacity expansion projects relating to natural gas and is used as a replacement for diesel fuel that we feel is entering a multi-year growth cycle.

With that said, we are also well aware of the financial uncertainty, lack of optimism and flattening in economic growth projections for 2013. We have experienced some slowing in the rate of order growth particularly in D&S industrial gas and biomed respiratory product launch.

For the third quarter of 2012 orders were $233.4 million, up slightly compared with second quarter of 2012 orders of $228 million. Orders for E&C was flat sequentially primarily due to our own capacity constraints. We expect our capacity expansion projects will allow us to reduce these on and plan to add new brazed aluminum heat exchanger capacity which I’ll speak to it in more detail in a few moments.

At D&S our LNG continues to gain traction and grow. As you know we are the worldwide leader in LNG equipments for the transportation and energy industries and the only company to address the entire LNG value chain from liquefaction through distribution, storage and end use.

BioMedical orders improved from the second quarter, primarily due to the add-on of AirSep order flow. Excluding AirSep respiratory order have continued to weaken due to significant headwinds in Europe and a continued phase in of Medicare competitive.

Let me comment in a bit more detail about each of the business segments. Our energy and chemicals business pulled the backlog of nearly $400 million worth of firm orders. We remain committed to successfully and efficiently delivering those projects to our customers. We continue to expect multiple small and mid-scale LNG project orders over the next few years. The compression capacity will be especially important in North America and China to support vehicle fuel and opportunities. Our ability to see across the LNG value chain and our discussions with customers are validating these expectations.

Secondly, with low cost ethane and propane feedstock available for the long term, we expect discussions for new large scale ethylene plants and natural gas liquids plants to continue. Finally large air separation plants will need to be built in China and India to support steel production and coal gasifier projects. As you may know all these projects will need brazed aluminum heat exchangers. Right now global capacity for brazed aluminum heat exchangers is essentially fully utilized. We intend to expand our brazed aluminum heat exchangers production capacity in the US. The expansion will include the world’s largest brazing furnace and is expected to increase our capacity by more than 40%.

These heat exchangers are a core competency for Chart and we expect this additional capacity will continue to provide a significant competitive advantage. With respect to distribution and storage, total orders of $120 million were essentially flat compared to the second quarter and we are $121 million in the second quarter of 2012. We have seen some LNG order delays as infrastructure projects are taking what we feel is a more realistic timeline.

We still believe these long term growth opportunities will grow. Our outlook in China is still very positive with respect to LNG opportunities and our capacity expansion projects in China will be fully operational by the end of 2012. North America LNG opportunities remain on track, although at a somewhat slower pace than we saw in the first quarter of this year. We are now seeing the railroad industry testing LNG field locomotives as an alternative to using diesel, which could become a significant opportunity for us in the future.

Momentum is also gathering for other high horsepower applications particularly marine, off road and stationary powered gen diesel replacement. European engine manufacturers are moving forward on LNG fuelled engines across the full spectrum of heavy duty trucks, all the way up to the largest chip board and stationary engines utilizing LNG in place of diesel or (inaudible) fuel.

[Packaged] gas demand remains weak as industrial gas customers continue to work inventories due to the forecast decline in global growth rate. As a result, we remain cautious for the remainder of 2012 and early 2013 with respect to our industrial gas business. In our biomedical business, we are experiencing much slower than expected demand for respiratory products particularly liquid oxygen therapy products which is Chart’s historical area of focus.

When you remove the effect of AirSep, orders for liquid oxygen therapy devices and concentrator were weaker in the third quarter compared to the previous quarter. AirSep contributed about $9.3 million of new respiratory orders in the quarter and $2.2 million in commercial onsite oxygen generation business. The underlying weakness in respiratory is primarily attributable to soft demand in Europe, especially Southern Europe where inventory overhang has been an issue which is among the home healthcare providers.

Our business continues to be impacted by the ongoing phasing of Medicare competitive bidding for respiratory products in the US, with customers pulling back awaiting announcements of the winners on competitive bidding. In addition some customer columns consolidation and the weak euro have had an impact. We do not believe that this is a long-term systemic issue as medical device demand will ultimately be driven by aging population globally and the increasing needs for long-term oxygen therapy products.

Also, with AirSep an industry leader in both portable oxygen and stationary concentrators, we're less exposed to current European weakness and strategically conditioned as demand begins to recover.

Michael will now provide you with our outlook for 2012.

Michael Biehl

Thanks Sam. Significant growth in LNG and other energy related business has offset continued weakness in our BioMedical respiratory business and our D&S industrial gas business. While we expected strong growth in energy related applications, the last couple of months have shown that we were somewhat optimistic regarding the second half 2012 recovery and weakening respiratory and industrial gas markets.

Therefore based on current order backlog, and business expectations for the fourth quarter, the company is lowering its earnings guidance for 2012. We're tightening our 2012 sales guidance range to 980 million to $1 billion which is within the range previously forecasted. Full year earnings per share for 2012 are now expected to be in the range of 235 to 245 per diluted share and approximately 30 million weighted average shares outstanding.

Included in our 2012 earnings estimates, our additional business from AirSep are approximately $0.10 per diluted share, for the anticipated restructuring charges for recent acquisitions. Excluding these charges, earnings were expected to be in the range of 245 to 255 per share. We still expect the full-year effective tax rate in a 30% to 32% range.

I would now like to open it up for questions. Because of the recent storm Sandy, Sam and I are at different locations today so bear with us as we answer your questions. With that said, Keith please provide instructions to participants to be able to ask questions.

Question-and-Answer Session

Operator

Yes, thank you. (Operator Instructions) And the first question comes from Eric Stine with Craig-Hallum.

Eric Stine - Craig-Hallum

Wonder if we could start on China. This is kind of been a theme for the entire year and talk of a slowing growth environment just open for an update on what you see there it sounds like you continue to be pretty positive but you still feel that that is in ramp up mode?

Sam Thomas

Absolutely, we clearly have seen a weakness and more conservatism or lack of optimism in ordering in the industrial gas space with the exception of our micro bulk product range. But our LNG related activities continue unabated, if anything we see customers starting to accelerate their plans and working hard to get more LNG vehicles out for LGN liquefiers and continue invests in the infrastructure. So we continue to see it as being several years in advance of the US opportunity and we are forecasting or we are looking forward to significant growth in China for LNG

Eric Stine - Craig-Hallum

And just to clarify that you said that you D&S, the expansion in China in D&S that will done by the end of 2012?

Sam Thomas

Yes, the currents expansion projects which we have announced will be completed and fully in production by the end of this year 2012, and we continue to look at whether additional expansions are required.

Eric Stine - Craig-Hallum

Okay, that is helpful. I wondering if we could disturb the North America and just on the liquefaction side, we are getting some indications of what the Shell is planning. Just maybe some thoughts around what they are doing and what we could see from some other industry participants?

Sam Thomas

What we have seen in existing equipment supply that we have for the publicly announced Shell activity particularly in Canada. Lead times or the expected startup dates have push out slightly. So that we were initially struggling to meet the delivery dates for their startup. We are now comfortable that we can beat all of their expectations based on other factors in their ramp up. As again they have said publicly they are hoping to make announcements within the next few months regarding additional investments in LNG liquefiers. So our sense is that their interest and the interest of several other major energy companies is unabated and moving forward what is clear is that as everyone focuses on ensuring that these are brought up into production safely and reliably that the entire supply base is challenged to meet some of the early expectations that were set.

Eric Stine - Craig-Hallum

And maybe last one for me just along those lines and in your capacity, I am just wondering right now and I know you are taking steps to address this in La Crosse but what's your ability right now if any to handle some of the quick turn projects or I mean is that something that we shouldn't think about here in the near-term until more of your expansions come online?

Sam Thomas

No we are continuing to ramp capacity at our La Crosse facility within our existing building and within the existing major pieces of equipment, we are still debottlenecking and adding personnel and we expect output to continue to improve into the first quarter irrespective of significant capacity expansion.

But opportunities will open up for quick ship opportunities as we get into 2013. But we feel pretty good about it. In terms of our other sites, the measured slowdowns in orders for LNG equipment as the current orders are digested by the entire supplier based EPCs and end users is allowing us to get caught up in a efficient manner, reduce our lead time and give us more flexibility.

In addition, the looking at the DNS business, the relative softness of industrial gas demand has meant that we are able to put more resources into our LNG efforts and ramp up our capacity and reduced lead times. So that we feel that we are very well positioned both now to meet customer expectations and for customer demand in LNG as it ramps up and industrial gas demand as it comes back.

Operator

And the next question comes from Tom Hayes with Thompson Research Group.

Tom Hayes - Thompson Research Group

A quick question Sam, as you are going through some of the details you indicated at least on the E&C side with your flat order rate and running at full capacity, I was just wondering did you pass on any business opportunities over this last quarter?

Sam Thomas

As we've indicated on the previous conference call Cheniere and Bechtel didn't go forward with orders to Bechtel for the LNG project in Louisiana. We were not successful bidder on that largely because we could not meet, or certainly a major factor to the fact that we could not meet the delivery schedule required by the customer and Bechtel.

Tom Hayes - Thompson Research Group

Okay, great. Thank you. I guess secondly, there has been a lot of news really all those hear and you kind of heated up this quarter on some of the larger companies like GE getting into the LNG, CNG vehicle fueling station business, I am just wondering if you could maybe provide an update on that portion of the business and really your outlook?

Sam Thomas

Sure, it's moving forward. We're working with a number of major energy companies as well as most if not all of the players providing equipment who are building LNG fueling stations. As an example, with General Electric, we're a potential supplier and have cooperation agreements with them, both with respect to small and mid-size liquefier equipments supply or station and distribution equipment supply as well as [unannounced] development project funded by the DOE to develop a solution for fueling natural gas vehicles at the home.

Tom Hayes - Thompson Research Group

Okay, and then just one real quick follow-up. Sam, in your prepared remarks on the BioMed section, you gave us two sales figures for AirSep. I just wondered if you can repeat that please?

Sam Thomas

I wonder if I could ask Michael to give you those.

Michael Biehl

The orders for on the LNG side, Tom?

Tom Hayes - Thompson Research Group

Yeah, I think Sam mentioned there was one on the respiratory side and I think you mentioned something on the PSA side of business as well?

Sam Thomas

I apologize Tom what I had said was AirSep contributed about 9.3 million of new respiratory orders in the quarter and 2.2 million in commercial onsite oxygen generation orders.

Michael Biehl

11.5 overall for AirSep.

Operator

Thank you. And the next question comes from Rob Brown from Lake Street Capital Markets.

Rob Brown - Lake Street Capital Markets

You about the rail trials that you are sort of looking at, could you give us a sense of kind of how that business could expand and what that opportunity could be?

Sam Thomas

Yes, bear with me just a minute. What we have been looking at is the supply of LNG for locomotives. Nominally, there are something like 500 to a 1,000 new locomotives built a year and 50 to 100 locomotives rebuilt with full engine rebuilds per year. Typically, the designs that we had in operation historically and are now back doing trials had been a large tender car roughly a 30,000 gallon vehicle that supplies a diesel locomotive on either side of it or natural gas engine locomotive I should say on either side of it. So there would be roughly one tender car available to each natural gas locomotive for every two natural gas locomotives. The total fleet of locomotives is in 25,000 units range but they are long lived assets. So you have this something under a 1,000 or roughly 6%, 7% replacements rates for them.

If the conversion is made it will be significant because typically if there could be infrastructure into provide LNG on a given rail line that will be desire to run as many of the vehicle as possible on natural gas. The savings are significant, the improvement in emissions are significant. Everyone seems to believe and I might talk about, I say everyone both the railroad operators and owners of locomotives as well as the supply chain seems to think this as a very high likelihood of going forward.

But you have to temper that with the fact that you are talking about a multiple year lead time probably on the order of three years to five years minimum to get significant penetration and to ramp up.

Rob Brown - Lake Street Capital Markets

And then second question, could you just give us a sense of the cost of your heat exchanger expansion project, I guess capital cost?

Michael Biehl

It will be about in the high 40s, including the land and furnace and everything like that, so approaching $50 million and should be an operation by the beginning of 2014.

Operator

The next question is from Jagadish Iyer of Piper Jaffray.

Jagadish Iyer - Piper Jaffray

Two questions. First, Michael can you give us some idea about how should we be thinking about the biomed margins going forward in fourth quarter and in the first half of ’13 now that the asset is closed and then I have a follow-up?

Michael Biehl

Biomed margins in the fourth quarter should be, now there will be restructuring charges in there, you know we are going to have about roughly $0.08 per share restructuring charges that we expect in the fourth quarter related to this acquisition so that will dampen a little bit and that's roughly $3.4 million. But in terms of their gross margin, the fourth quarter, we would expect them to be somewhat similar to what they were at actual rate in this last quarter. Going forward, we would expect that as we clear out some of those restructuring charges, we would expect them to be sort of in the mid 30% range, the concentrators do carry a lower gross margin than our other biomedical products, but we would expect them to be sort of in that mid-30% range going forward.

Jagadish Iyer - Piper Jaffray

That's really helpful, and Sam I have a big picture question. As we look out into ’13 what are the broader themes that we should be looking for in terms of, projects are big picture things, like one or two kind of get hold of to look at the growth profile for you guys? Thanks.

Sam Thomas

We see small and mid-scale LNG to be very positive. We are working on a lot of potential both in China, North America and increasingly several of the energy majors are looking at global expansion including Europe, Africa the rest of Asia. So that’s an area where we are devoting a lot of our marketing and quotation activity.

Second area is for olefins production, both ethylene purification plants or coal boxes, primarily in North America with at least four plants are in the planning stages with a couple of them quite likely to go forward in 2013. There are also a significant number of propane dehydrogenation plants for the production of propylene both in China and North America that use propane as a feedstock.

So we don't expect the sort of headline $100 million or $50 million orders LNG liquefaction projects, certainly not in the first half of 2013 or potentially not in 2013 at all because there is a large backlog of plants being constructed at the moment and global supplier capacity and EPC capacity is fairly stressed. But the two areas that I had mentioned, small and mid-scale LNG, lots of prospects; olefin production, lots of prospects and finally natural gas processing or NGL liquids plants continue to be strong with plenty of them to draw on board.

Jagadish Iyer - Piper Jaffray

That’s really helpful. Just one quick housekeeping question Michael, did you call out how much was the AirSep revenue contribution to quarter please in Q3? Thanks.

Michael Biehl

It was I believe $8.9 million.

Jagadish Iyer - Piper Jaffray

Okay, good.

Michael Biehl

$8.6 million, I am sorry.

Operator

Thank you. And the next question comes from Chase Jacobson with William Blair.

Chase Jacobson - William Blair

Well, Sam as you addressed some of my question in the last answer you gave, but just trying to get a sense on maybe the timing of the next pickup in backlog growth in the E&C business, you mentioned that we probably shouldn’t expect any of the large $100 million awards in the near-term. It sounds like a lot of, what's going to be going into the new brazen unit maybe may not be related to large LNG but more on the petrochem side. When we look at these petrochem projects and we see them moving to the EPC phase, what is the lag in timing from when it goes to EPC to when we should be expecting awards for Chart?

Sam Thomas

The lead times of those projects is typically driven by the construction of a high temperature furnace which we don’t participate in. So that is the gating item for EPCs releasing orders for these plants, but I would expect within the three or six month time period following EPC announcements to see orders.

Chase Jacobson - William Blair

Okay. And I guess given where the lead times are in your business now, is it safe to assume that this new unit will have work as soon as it’s up and running?

Sam Thomas

That’s certainly our utmost desire and we are moving forward because we still are confident of the growth in demand because of energy markets. Even if there is no satisfactory resolution of the fiscal cliff issues and 2013 would end up in a decline, we would still move forward, because we are very confident in the medium-term, the two to five year timeframe with respect to demand for brazen aluminum heat exchangers and want in the position to supply the customer base.

Chase Jacobson - William Blair

Okay. And a question for Michael, you mentioned in your prepared remarks that there was a favorable mix in the D&S business. I think over the last few quarters our business is actually had unfavorable mix. Can you just give little color on what was better this quarter in D&S and if we should expect it to stay that way?

Michael Biehl

Primarily on the LNG side in terms of the products especially in the US not in China because there is always a typically lower margin, then our LNG orders in US, but we had a lot more production of LNG going to the plans in this quarter. We would expect that be comfortable in the fourth quarter as we move forward.

Chase Jacobson - William Blair

Okay. So with that LNG tanks and vehicle your LNG vehicle fuel system.

Michael Biehl

It will more tanks and station tanks and mobile equipment, not necessarily the truck tanks but the mobiles and the station tanks and things like that on the LNG side.

Sam Thomas

As we ramp up our efficiencies are improving on those products, and we look to be able to continue to improve efficiencies and enhance gross margin at both three locations by US, China and Europe based on continuous improvement activities.

Michael Biehl

The other things too is that as Sam indicate as we ramp up all kind of the at least that we entered into prior years, it is pretty close to fully operational now so we are getting efficiencies out of there, and that’s dedicated LNG equipment.

Operator

And the next question comes from Martin Malloy with Johnson Rice.

Mart Malloy - Johnson Rice

I want to ask a question about the expansion projects, you've got a number of projects that have been completing recently or expected to be completed recently. I'm just trying to get a better idea of how much these projects would add in terms of annual revenue capacity when we look at Lake Charles or (inaudible) Minnesota and China E&S projects or expansion projects.

Sam Thomas

Yeah, in total it supports growth rates of our total revenues in the 20% to 30% range and takes us out to being able to support that with additional potential in 2014 of expansions through 2014. Typically in individual product lines the capacity additions have been in 30% to 50%, but for Chart overall it looks like they will support revenue growth in the 20% to 30% per year.

Mart Malloy - Johnson Rice

And then on the brazed aluminum heat exchanger side, you mentioned that the industry capacity was very tight right now, could you talk about pricing trends there and what that might mean for E&C segment gross profit margins over the next 12 months.

Michael Biehl

Marty with the capacity being sold up and as the market continues to grow E&C margins are sort of in an average at around 30% this year and we would expect that to move up slightly next year sort of the low 30s. One of the things that we will be going through our plants next year are the large scale LNG projects which tend to have lower margins. So that will dampen some of the margin growth on E&C now the smaller projects that we have gone through will be coming through a higher margins that are currently in backlog.

So you will have an offset by those larger ones, but overall should average sort of low 30s and as we move up into the future we should continue to see that margin grow but not to the same level that in the prior cycle. I think we got up to 42% in the prior cycle but we have a large mid-scale project in there. We don't think it will get up that high. Ultimately when we work through some of these bigger projects through backlog dependent upon what the mix is as we go forward, could get into the mid 30s or possible high 30s but that's hard to call right now based upon what products are in the backlog and coming through the plant.

Operator

And next question comes from Greg McKinley of Dougherty & Company.

Greg McKinley - Dougherty & Company

Could you comment on the level of energy or LNG related backlog within your D&S segment now just so we can get a sense between sort of industrial and energy related revenue mix there.

Sam Thomas

We typically don't break that out Greg, but it is consistently growing and probably represents something on the order of $60 million at the moment.

Michael Biehl

I would say, 60 to 65, that’s about right. You know, based upon the orders that we pulled in the backlog the last two quarters of LNG orders.

Greg McKinley - Dougherty & Company

One thing I am just sort of trying to better under is the North American LNG fueling infrastructure market builds out, of course the fueling station developers that people talk a lot about are Shell and Clean Energy. Are there enough signs in occurring in the industry where you expect another energy major or two to throw its hat in the ring and put some assets to work for fueling stations?

Sam Thomas

We're certainly working with several companies who are going down the path of providing LNG liquifiers. So we're optimistic. It is a challenge to accurately reflect the timing of fuel stations going in to service because there is both the lead times and permitting issues to install the station. You don’t want to start out the station if you don’t have fleet of vehicles that are available to utilize that station. And you will also have to have LNG available to provide the fuel. So there are inevitable fits and starters as we ramp up all three of those aspects.

Greg McKinley - Dougherty & Company

I just want to better understand distribution channel within your respiratory biomedical business I think we all understand who the end customer is it’s the individual chronic respiratory disease, but as you are manufacturing these tanks or concentrators they are going to inventory supply for like home health care provider and then a doctor prescribes that there is a reimbursement for that cost and then it goes to the patient. Can you help us understand the flow of the product and where you are seeing the disruption the demand for because I am guessing it isn’t disrupted at all in terms of the consumer need for it.

Sam Thomas

Correct the consumer need is constant and growing, but there is turnover of existing assets which are owned by the Home Healthcare companies and the Home Healthcare companies are by the way our customers and they are the providers to the individual patients as well as the ones who were invoicing the federal government to receive payments on a monthly basis. And as players change hands and a (inaudible) there is some 500 or 600 Home Healthcare providers although the top three probably represent something like 40% to 50% of the total demand for the total patient base. As we get into competitive billing and the 90 regions or metropolitan service areas that are currently being competitively bid, there is uncertainty amongst those home healthcare providers as to who will be the winner and the same situation exists in Southern Europe. And therefore, there is a consorted effort by the home healthcare providers to avoid purchasing inventory and to increase returns of their inventory. So that as units come back from a deceased patient they are refurbished and send out to newer patient. So that they are trying to improve the efficiency of the use of their assets at this time, until they know whether they are successful bidders and hence need to make significant purchases or unsuccessful bidders who don't need additional problem.

Greg McKinley - Dougherty & Company

Yeah, and as this processes sort of play out in the US and Italy and Southern Europe as you said, do you envision that your customer base in terms of number of direct customers consolidate so you are doing business with a small number [or] very large customers?

Sam Thomas

That is the stated objective of Medicare to consolidate the number of home healthcare providers by reducing reimbursement and what we believe will be a natural consequence of consolidation that will be fewer and larger customers base for us and our major reason for the acquisitions we have made in the home healthcare field is to become the clear preferred supplier to the smaller number of more powerful home healthcare providers.

Operator

And the next question comes from Bill Priebe with Geneva Capital Management.

Bill Priebe - Geneva Capital Management

Could you give us an update on perhaps additional capacity coming in from in the heat exchanger area in the US from a company like Linde. If there's any, I haven’t heard there was some plans to bring in some competitors into the US to add to the capacity?

Sam Thomas

There is always discussion, I'm not aware of any publicly announced plans to do so. Linde does manufacture in Germany and in China.

Michael Biehl

Air products is expanding down to Florida but they make a spiral round heat exchanger.

Bill Priebe - Geneva Capital Management

Which you don't market?

Michael Biehl

That's correct.

Operator

(Operator Instructions) Alright there are no more questions at the present time. So I would like to turn the call back over to Sam Thomas for any closing remarks.

Sam Thomas

Yeah, we are very pleased with our strong sales growth in the quarter and the continued prospects for significant growth in our LNG and diesel fuel replacement markets. The fiscal cliff or uncertainty has impacted us more than we had anticipated just this past August and we continue to see that as many other industrial companies have been reporting. It’s quite clear to us that capital investment decisions which our equipment are based on optimism of the near future and the ability to utilize that equipment.

So we believe that the fiscal cliff issues and the lack of optimism or concern to wait what happens, to see what happens is affecting us. However, the availability of credit is a real positive for the North American market. So I think its fair to say that we believe the Fed is doing its job but we do need our elected officials to resolve the fiscal cliff issues so that there is more [uncertainty] and hence the potential for confidence going forward.

Aside from that, we see this breathing room as an opportunity for Chart to significantly improve its lead time and continue an orderly ramp up to have capacity available for both the natural gas opportunities and our base industrial businesses as we go forward.

I continue to be very optimistic about long-term resurgence of US manufacturing economy and that's having very positive benefits for Chart in the medium-term. With that, thank you very much and we look forward to speaking to you at the end of the next quarter.

Operator

Thank you. This concludes today's teleconference. You now disconnect your phone lines. Thank you for participating and have a nice day.

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Source: Chart Industries' CEO Discusses Q3 2012 Results - Earnings Call Transcript
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