Good morning, and welcome to the Chart Industries, Inc. 2017 Third Quarter Conference Call. [Operator Instructions] 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 Thursday, November 2. The replay information is contained in the company’s earnings release. Before we begin, the company would like to remind you that statements made during this call that are not historical, in fact, are forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied in the forward-looking statement. For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the information regarding forward-looking statements and risk factors included in the company’s earnings release and latest filings with the SEC. These filings are available through the Investor 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 Jill Evanko, Chart Industries' CFO. You may begin your conference.

Thank you, Christie. Good morning, everyone. Thank you for joining us today. I will begin by giving you an overview of our third quarter results, including our recently closed acquisitions of Hudson Products in Energy & Chemicals and VCT Vogel in Distribution & Storage. I will provide our revised outlook for 2017 and the status of the benefits from our restructuring activities. Then, Bill Johnson, President and CEO, will provide comments on current market and order trends across the 3 business segments. Net income for the third quarter of 2017 was $1.5 million or $0.05 per diluted share. Third quarter 2017 earnings would have been $0.30 per diluted share, excluding $2.7 million of restructuring costs and $7.4 million of acquisition-related costs. This compares with net income of $2.8 million, or $0.09 per diluted share for the second quarter of 2017, or $0.21 per diluted share on a comparable adjusted basis. Third quarter 2016 net income was $15 million or $0.48 per diluted share. The third quarter of 2016 net income included the benefit of the BioMedical insurance settlement of $16 million. Total sales for the third quarter of 2017 increased to $240.5 million from $238.2 million in the second quarter of the year, and $203.9 million in the third quarter of 2016. Third quarter 2017 included results of Hudson Products, which closed on September 20. Hudson contributed $6.1 million in sales and $1.2 million in operating income to Chart in September, while VCT Vogel, which closed August 31, contributed approximately $400,000 of sales and $110,000 of operating income. Excluding Hudson and VCT Vogel, sales declined sequentially from the second quarter of 2017 by 1.8%, driven by timing of cryobiological sales in our BioMedical segment. We still forecast a record sales year in cryobiological. Growth from the third quarter of 2016…

Thank you, Jill, and good morning, everyone. I will provide an update on each segments third quarter results as well as market trends we are seeing as we finish 2017 and head into 2018. Energy & Chemicals segment sales of $46.6 million, $40.5 million excluding Hudson, were organically flat to the second quarter of 2017 and up 71% versus the third quarter of 2016, which excluded Hudson. During the third quarter, our E&C business booked $65.9 million in orders, including $3.8 million for Hudson. This was a second sequential quarter with E&C orders above $60 million and the largest since the third quarter of 2016. U.S. upstream oil and natural gas end markets have strengthened over the past 12 months, generating increased air cooled heat exchanger demand for natural gas processing plants. And multi- year build-out of natural gas transmission infrastructure continues to drive improved air cooled heat exchanger demand for compressor stations. Natural gas demand from both petrochemical and LNG export projects have continued to show strength in the third quarter. Much of that demand is being fulfilled from Permian associated gas, resulting in increased demand for midstream cryogenic gas plants. As Jill mentioned, this development has generated year-to-date orders of approximately $20 million for Chart’s brazed aluminum heat exchangers and additional air cooled heat exchanger content. The addition of fans through our Hudson acquisition has diversified exposure to power generation and increased aftermarket activity. Aftermarket demand across fans end markets has driven steady demand for both the Tuf-Lite and Cofimco product Hudson brands. On the air cooled heat exchangers side of the business, for both Chart legacy and Hudson, demand has continued to strengthen over the past 12 months from U.S. upstream oil and natural gas market improvements and a multi- year build-out of natural gas transmission infrastructure.…

[Operator Instructions] Our first question is from the line of Rob Brown of Lake Street Capital Markets.

Good morning.

Good morning.

Good morning.

You mentioned the LNG FEED studies and engineering activity picking up, could you give us some sense of what the – what sort of pipeline that engineering activity supports?

I mean, we continue to see a lot of interest in our IPSMR technology, in particular. We have a number of customers who’re asking us to do studies on it. I don’t want to talk about the specific customers, but…

Okay. Fair enough. And then on the Hudson acquisition, you’ve now closed it. Maybe – could you give us a sense of your view on the opportunity there and – in terms of integration activity and end market – market growth?

Yes, I mean, we closed on it on – what?

September 20.

September 20. So we’re just now starting the real integration work. We’re pleased with the first month or so of what we bought. I can say there is no big surprises that we found. We anticipate them meeting or exceeding the plan that we have for the acquisition, and we look to 2018 with the combined business of our air cooled heat exchanger in there – air cooled heat exchangers to be probably flat 2017 to 2018, because the drivers in that business right now are the natural gas processing plants. We’ve seen that uptick happen this year. We forecasted that same up – same level of activity will be driving the businesses in 2018. So I would say we’re very pleased with where we’re at and then going into 2018.

And Rob, we continue to expect to achieve the $7 million plus of cost synergies from that integration in the first 18 months, and our 2018 outlook is above $200 million in sales for Hudson and EBITDA margin of 22%.

Okay, great thank you. I’ll turn it over.

Thank you. Our next question is from Eric Stine of Craig-Hallum. Your line is open.

Hello, hi Jill. I’m just going to start with D&S and just dig into China a little bit. The last few quarters you’ve seen some positive trends, you’ve been more cautious, but I mean – with now two pretty strong quarters in a row, I mean, do you feel like it’s enough to call the recovery there sustainable and potentially, you see some acceleration, given the order you just talked about the framework order in October? Or is it still something you’re still little – you’re cautiously optimistic on?

I would say, we’re still cautiously optimistic. We’re working really hard on the cost side of things to get into our single facility over there. We’ll have that done by the end of the year. There is – China is experiencing growth in heavy-duty trucking and then all the fueling stations, and we’re participating in some of that work, which is kind of driving the numbers that you’ve seen in the last couple of quarters. So – yes, I would say, cautiously optimistic.

Given that, that market has been – I mean, it’s been pretty tough over the last couple of years. I mean, has there been any change to the competitive environment? Is it – any competitors that have gone away because of what’s gone on there over the last couple of years? Or I mean, do you still view it as very competitive? You can comment a little bit of a premium, but it’s still quite competitive for you.

Yes, I would say, that’s exactly right. There’s still a lot of competitors in the market, still very competitive. We – Chart is recognized as a technology leader. So we do get a bit of a premium. But it’s not a huge premium. But – yes, still a lot of competition.

Okay. And then just on the margin side, I mean, a strong D&S margin, but China – China seems starting to pick up. I mean, how should we think about margins? I mean, China a little bit lower-margin business, but yet you’ll have consolidation done end of the year. So maybe some color on your thoughts for D&S margins going forward.

Yes, we expect D&S margins going forward to be at the same levels of our Q3 reported D&S gross margin.

Okay. And then just last one from me, and this has been a question over the last couple of quarters. But consolidation last year or as of late, in the industrial gas segment and – you kind of thought that it was still a little early to tell if that was going to have any impact on that business for you. And where do you stand on that right now?

Yes, I – my answer hasn’t changed. We haven’t seen a lot of change to our incoming order rates based on the consolidation

Okay thanks.

Thank you. Our next question is from Martin Malloy of Johnson Rice. Your line is open.

Good morning

Good morning

Just want to maybe – if I could, just go over with you some of the key changes to EBITDAs when we look from 2017 to 2018 that we should be thinking about. You mentioned the impact of the restructuring, the lack of expenses that we will have in 2018 and then also the benefits from that. I think you said $29 million.

Correct. That’s a swing from 2017 to 2018.

Okay. And then maybe about $30 million EBITDA contribution from Hudson year-over-year?

Little more than that.

Okay. And then whatever we come up with as far as the organic growth in the business on top of that?

Correct.

Okay. Anything else that we should be thinking about there as far as 2018 or 2017 growth?

No. Those are the main 3 categories, and I guess, only thing I would add there is with respect to the organic growth, we do expect each of the 3 segments to grow organically 2017 to 2018.

Okay. Okay, great. And then on the LNG bunkering facilities. Can you maybe give us an idea in terms of what’s the scope that you’d normally sell into some of those facilities?

Yes, it varies. I mean, in some cases, we do a lot of the engineering work. In some cases, we supply just product to it. The bulk of the product is tanks, and as I said, kind of that 500 to 1,000 cubic tank with vacuum-insulated piping that goes along with it and then regasification if needed to – if needed on site, depending on what the use for the gas is.

Okay. So are these typically kind of a $1 million to $2 million revenue item or?

It can range anywhere from $5 million to $30 million, just depends on how big the terminal is and how much content we have and whether we have an engineering work or not.

Okay, great thank you.

Thank you. Our next question is from Ole Slorer of Morgan Stanley. Your line is open.

Thank you very much. I was just going to return to the LNG segment again and the gas segment on FIDs. How – in terms of the business that you are working on winning at the moment, how U.S.-centric is that in terms of FID solving on smaller modular projects from few other people you mentioned and orders have been already in the pipeline, relative to kind of mid-scale floating LNG projects that are kind of cropping up in West Africa. It’s difficult for us to kind of get a real handle on the timing of any of this. So any help there would be useful.

Yes. So I would say, we – there’s certainly the projects that everybody knows about the Cheniere, Magnolia and then Tellurian and Driftwood projects in the U.S. are all using some form of mid-scale modular technology. And then, there – the Delfin FLNG projects would use Black & Veatch, I think, is probably the technology that’s there, and they would use our cold boxes and brazed aluminum heat exchangers for that particular project. But then you have Venture Global and that would be cold boxes and heat exchangers for us as well in content. So I would say lot of U.S.-centric stuff going on, but we also are involved in the floating stuff, Ole.

Yes, and what you view as most real in terms of getting across the final line on FID? There are, clearly, lot of projects. Do you – you favor the U.S.? Or is it – do you think that there is an equal and real opportunity in the stuff that’s going on with Kosmos, BP and everything else in West Africa? Have you read about – or are you seeing those projects are – are you most excited about being able to get across the – that the goal line?

Yes, I would say for us, the U.S.-centric ones are I’m probably the most excited about. I’m not saying that the other ones aren’t viable and don’t have a reasonable opportunity to get through across the goal line. But I would say, somebody like Cheniere has a fairly high probability just because of its existing site.

Yes. I know when you started out, Bill, you highlighted the aftermarket as an uncapped opportunity at Chart. I wonder whether you can update us on what you’ve done to capture that opportunity since you’ve started – since you took over as CEO?

Yes. So we – one of the things is with the Hudson acquisition, this whole fan business, about 60% of the fan business is aftermarket. So we’re really excited about that and bringing that on. We also, as you know, did the Hetsco acquisition in January of this year, which was service component – service organization working on brazed aluminum heat exchangers and working in the energy field. So that was kind of a $20 million, $25 million kind of revenue company. And so we’ve been – we brought that into our Lifecycle business. So our total Lifecycle business now is about – what?

$50 million to $60 million of legacy Lifecycle plus the Hudson.

Yes. So $50 million to $60 million of legacy of the Lifecycle business plus the Hudson business. So we now have, I think, a pretty good base to build on. We’re really interested in – and the VCT Vogel acquisition also, Ole, was a D&S service business. We’re interested in continuing to expand that in all geographies around the world to – for servicing and repair of tanks.

And just finally, I mean, we’ve all been very excited for a long time about the opportunity to display these with China with LNG as a fuel for local transportation and also trucking, et cetera. But it proved to be very difficult to make money there. So now you – but – yes, the Maritime opportunity in light of the fuel regulations coming in next year or the trucking opportunity in Europe, could you sort of rank them a little bit relative to what’s going on in China? As well for that matter, in terms of what you see as there the best – not only the best revenue opportunity but the best opportunity increment – to actually put incremental dollars on the bottom line?

Yes. I mean, 2 very different questions, probably. The – if you look at China, about 6% of all the trucks are LNG trucks. And they have – I think, in the first 7 months of this year, they added 39,000 LNG heavy-duty trucks, which is pretty substantial increase in the trucking volume. And I think, we’re going to continue to see that trend in China, because of – and particularly in the north where they have a lot of pollution and where they’re wanting to mitigate that. And I think there’ll be – once the capacity gets absorbed that was put in the last upcycle, you’ll see more liquefiers going into China. Again, I think the pricing is difficult and it’s more of a challenge. But for sure, there’ll be a lot more LNG used in China and more capacity will have to be added sometime in the future. When it comes to the bunkering side of the things, I think the thing that we have to be cautious about there is that, even though there is regulations in 2020, there is a couple of ways to solve the problem. One is through LNG ships and the other one is through using low-sulfur diesel. So the real question on my mind is how they’re – how are they going to enforce the regulations. And if they really enforce the regulations, I think, you’ll see a faster move to LNG. If they’re kind of slow on the enforcement side, I think you’ll see some of these shipping fleets continue to use low-sulfur diesel, and they can still meet the standards by doing that. But if oil prices go up and the low-sulfur diesel prices will go up with that, of course, then that will make LNG that much more attractive. And so I think what you’re seeing in Europe is they’re putting in more bunkering, more stations in anticipation of this, and we’re also seeing it in other parts of the world. So – and those types of projects tend to be a lot more profitable for us than anything in China would be. So from a margin standpoint, those are good. I think there’s going to be a lot of volume in China, we’ll have to work hard to try to make our dollars there.

And thank you very much for that. Thanks.

Our next question is from Pavel Molchanov of Raymond James. Your line is open.

You’re, obviously, sounding pretty optimistic on China. But I guess to be a little more concrete about it, are you seeing any opportunity to perhaps revive those long- forgotten PetroChina contracts that have been on ice for the last 3, 4 years as far as LNG fueling stations?

Yes. I would say, we’re not seeing it. We – I would temper – I would comment on your remarks that we’re optimistic. I would say, we’re cautiously optimistic.

Okay. Fair enough. And then on BioMed, kind of a political question for you, apologize for that. We have, obviously, seen health care reform throughout the last 6 months in terms of headlines out of Washington. Has that had any impact on – whether it’s Medicare purchasing or just general industry sourcing trends given the policy uncertainty about insurance subsidies and reimbursements, et cetera, et cetera?

There’s been no substantive change in the reimbursement rates, so I don’t think we’re seeing a change in the buying behaviors of the consumers. There’s two channels for that. There’s the DME, the durable medical equipment, people, and then there’s the direct-to-consumer channel. And I think both those channels have customers and reasons why people go to those channels and they still exist. And that can change if the Medicare reimbursement rates change, but we haven’t seen anything.

Appreciate it.

No thanks.

Thank you, our next question is from Jeff Osborne of Cowen and Company, your line is open.

Hey, good morning. I just had two quick ones. As the market moves from single-chain solutions to the small and mid-scale, how do we think about the margin potential if any of these opportunities were to manifest themselves? I know several years ago, the prior management team talked about excess capacity of welding out there and – with that from your competitors as well as yourselves and margins would be tough if there was any meaningful orders. But given the shift in technology scope, should we think that, that’s less relevant?

Yes, I would say so. I mean, for us, what’s different about this cycle than last cycle is the IPSMR technology. We actually have a technology to sell. We spent 10 years getting patented. And as we look at that and as people adopt that technology, there is a pure technology feed that gets associated with that, that improves the margins overall.

That was my assumption, I just want to double-check. And then second one is just a quick accounting question. So for next year with the $15 million now in savings, is there a way to couch that as to how much would flow through COGs versus OpEx?

Yes, it’s about 50-50 split between the two.

Great. And then the – no change to the tax rate as far as you can tell at this point for 2018?

No substantial change. We’ll have a small benefit as we start to be profitable in China, which we anticipate to start in the first quarter of 2018. So you would expect low 30s for 2018.

Great. Thank you

Thank you. Our next question is from Matthew Trusz of Gabelli, your line is open.

Good morning, and thank you for taking the question. So, Bill, you sized the $6 million contributions in the LNG engineering work in the quarter, how one-time in nature recurring is this? Is this going to be an ongoing revenue stream opportunity from various projects and so you start seeing the FIDs?

Yes, I mean, as the natural flow of things is for there to be a FEED studies and those types of things, we get paid for that work. And then as the project progresses, it goes into the different stages of the EPC. But – so we work with the EPCs, and we’ll work with the energy companies or whoever is trying to validate the technology, and we get fees, engineering fees for that. So it’s – It reoccurs as we go along. And that is kind of – especially with IPSMR, that is something that will be reoccurring as we go forward.

Great. And then turning to BioMed. Can you just talk about the order strength and trends in portable concentrators? How do we assess your market position going into 2018? Is there anything you can say to update on the DTC initiative?

We’ve launched the DTC, the direct-to-consumer, initiative. I would say, we’re very early in the stages of it. And we’re learning as we process orders and as we get more exposure to the channel. But it’s a fairly small number right now. But every day, we’re selling more units through the channel.

Great. Thank you

Thank you, our next question is from Martin Malloy of Johnson Rice, your line is open.

I just want to follow up. On the – with the Hudson acquisition, is there any impact on the cash taxes that we should think about?

Very minimal impact, Marty.

Okay, thank you.

Thank you. And that concludes our question-and-answer session for today. I’d like to turn the call back over to management for any further remarks.

Thank you Christie, our third quarter and year-to-date results across the three business segments reflect our reduced cost structure and support our full year outlook. Our reduced cost structure can support future growth, which is expected across all business segments, as we head into 2018. We are pleased with the strategic additions of Hudson and VCT Vogel to the Chart business, and expect additional profitable growth and EPS accretion from both in 2018. Our actions year-to-date support our strategic vision for profitable growth over the coming years. In addition to properly sizing our cost structure, we will continue to focus our efforts on organic and inorganic growth in key verticals, inclusive of continuing to build our aftermarket in E&C and D&S as well as offering complete solutions in our targeted industrial markets. Thank you, everyone, for listening today, and goodbye.

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