Good morning and welcome to Chart Industries Inc. 2019 Third Quarter 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. The company’s supplemental presentation 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 following the conclusion of the call until Thursday, October 24, 2019. The replay information is contained in the company’s press release. Before we begin, the company would like me to remind you that statements made during the call that are not historical in fact are 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. 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 Jill Evanko, Chart Industries’ CEO.

Thanks Kevin. Good morning everyone and thank you for joining us today to go through our third quarter 2019 results and our current outlook for 2020. Joining me today is John Bishop, our Chief Operating Officer who has responsibility for Chart business services, investor relations, business development, and acquisition integration. You’ll hear from John later in the call about the progress of our integration efforts on both VRV and Air-X-Changers, including an update on our original Air-X-Changers cost synergy assumptions of $20 million to a revised number of $29 million, still within the original timeframe of the first 12 months of ownership. We’ll walk through to our supplemental presentation that was released this morning. Starting on Slide 2, this represents how we think about our business opportunities, many of which are driven by what our customers are telling us underscored with profitable growth. We are focused on our industrial gas and energy end markets supported by the elements in A through E around the circle. Letter A is the growth machine for our business over the next seven to 10 years, the global LNG infrastructure build out. The focus of the activity is small scale LNG as well as transportation and associated fuelling stations, which you’ll hear about today. Letter B is our innovative solutions, including our process technology as well as our upfront engineering and design. In the third quarter, we signed an MOU with AG&P to develop LNG infrastructure globally with a focus on India. With our previously signed MOU with IOCL, we now are working directly with two of the leaders in the Indian city gas network development. Letter C represents the only reason some of you listen to this call. With updated timelines from certain customers and leaps towards FID in the third quarter, we are…

Thanks Jill. As you’ve heard for the past 12 months, we are hyper focused on continuing to execute on margin expansion activities, both within our VRV and Air-X-Changer integrations as well as in our core business. In the core business, as shown on Slide 11, we have taken actions that will give us $13.3 million of full year cost synergies which we anticipate in our 2020 results. The red text on the slide are specific actions that we have taken during the third quarter. Additionally, we have further actions underway in the fourth quarter that we expect to add an incremental $5 million of savings to 2020. All of these are excluding the revenue and cost synergies from our acquisition integrations, which also contributed significant bottom line impacts. Additionally, our high margin aftermarket service and repair business is over 15% of the total revenue in the third quarter, up from 2018’s 13.5% of revenue. Now flipping to Slide 12, both of our major acquisitions from the past 12 months - VRV, which closed November 15, 2018 and Air-X-Changers, which closed July 1, 2019 - are performing above our original expectations in different ways. Starting with our most recent addition, AXC, we have completed projects to deliver over 60% of our original $20 million of cost synergies, including completing the facility consolidations at Tulsa eight months ahead of schedule, and more importantly the team has identified additional cost savings from the combination of our air cooled product lines and therefore we are increasing our cost synergy target from $20 million to $29 million, still to be achieved within our first 12 months of ownership. While I primarily focused our Air-X-Changer integration discussion around cost synergies, there are meaningful revenue opportunities as well, and I’ll elaborate on two of these that we…

Thanks John. Slide 13 shows our third quarter adjusted EPS of $0.77, an increase of 13% over the second quarter of 2019. Row 1 is comprised of $7.4 million of restructuring and transaction related costs or $0.17 of EPS, and these are the costs associated with the margin expansion activities previously described as well as remaining transaction costs from the Air-X-Changers deal. Row 2 relates to $1.4 million of integration costs or $0.03 of EPS, and Row 3 is $2.3 million of other one-time costs or $0.05 of EPS. These costs relate to two specific commercial settlements that were completed in the quarter. One was related to a longstanding commercial topic from 2012 on a specific price issue for one model tank The second related to commercially agreeing with an EPC on ownership of contractual requirements from a previously completed joint project. Flipping to Slide 14, our 2019 guidance includes second half 2019 revenue and earnings from the completed Air-X-Changers acquisition and includes additional interest and share count from our completed strategic financing activities. Our guidance assumes LNG project revenue in 2019 from Calcasieu Pass and Gimi projects which is subject to project timing. We are updating our revenue guidance to an expected range of $1.33 billion to $1.35 billion for the full year of 2019, reflecting timing of orders that will book and ship within 2019 but will positively impact 2020. We expect full year adjusted earnings per diluted share to be in a range of $2.70 to $2.90 per share on approximately 34.7 million weighted average shares outstanding. This excludes any restructuring and transaction related costs and assumes our effective tax rate to be approximately 21%. We are expecting Q4 order activity to be significant. We have line of sight to three potential orders over $20 million each…

[Operator instructions] Our first question comes from Martin Malloy with Johnson Rice.

Good morning.

Hey Marty.

I like the new motto.

Thank you.

You’re welcome. I wanted to ask about the 2020 guidance and your description of the end markets for re-gas storage distribution around the world. It sounded pretty optimistic to me. I’m just trying to gauge the degree of conservatism that might be in your guidance for the D&S East and West growth rates from ’19 to ’20.

Yes, we’ve taken a kind of the down the fairway approach on the base case for 2020 here, so I think there’s areas that we have some conservatism in but other areas that there’s a little risk in, so I would say that there is more upside to the D&S businesses than there is downside, and there’s probably a little more downside to the E&C businesses than there is upside.

Okay, then with regards to the IPSMR technology, you’re now got three IOCs, I think, that have validated it.

Correct.

Could you maybe talk a little bit about the timing and prospects for when we might see a potential opportunity there for you?

We’re obligated under our confidentiality agreements not to share who those IOCs are or where they are in terms of projects and potential utilization of IPSMR, so I’m a little restricted to what I can tell you on that. Suffice it to say that they’ve put as much effort in the past three to five years to validate the process and so we would expect that that’s not for naught, and we would think that in the next few years we’ll be able to officially announce something to you guys on which one and what the project is for.

Okay, thank you.

The next question comes from Conner Lynagh with Morgan Stanley.

Thanks, morning guys.

Hey Conner.

I just wanted to dive in a little more on that comment you made. What would be the drivers, what makes you think there’s more upside on the D&S side and more downside on E&C? Which of these--maybe if we’re looking at Slide 15 here, which of these markets do you think would be driving those differential outlooks?

I think if you look at Slide 15 on the D&S side, there is some more potential on the industrial gas side, and that’s really around their refurbishing of existing tanks versus new builds and new purchases, so that 3% could be 4 or 5%. Certainly LNG infrastructure, both in the east and the west, is an area that we’re seeing more and more joint packages of our D&S product with our E&C product, so we’re excited about what the potential is there. Then the long term agreements with our two sole source customers on the over the road trucking business, that really could take off a little bit faster as some of these creative solutions that we referenced on the call come into play. I can’t give too much detail on that, but there is a next-generation potential on the LNG over the road trucking tanks that could increase 2020 as well.

Okay, thanks. That’s helpful. Also, just wanted to ask, it seems like there’s some decent margin expansion implied in the 2020 base case outlook. Can you just talk through--I imagine some of that is mixed with some of the big LNG cryo content, but can you just talk through at a high level how much is mix, how much is self help, just any other factors that are driving that?

Yes, so let me step back and just walk through 2020 briefly. You have tens of millions of dollars from our 2019 cost-out actions, and then you’ve got this first 12 months of nearly $30 million out of Air-X-Changers, so those two are absolute dollars dropping through. We also have some benefits that we didn’t call out specifically which are included in the organic growth related to price in D&S as well as the sourcing savings that we’ve achieved already and are in the bag, so that’s--I wouldn’t call that mix, I’d call that activities in the bag and ready to go. Then, there is an element of mix on the big LNG projects that give us an absorption benefit, so while they’re not priced differently than our traditional packages, we get benefit through our facility on absorption, which does help the mix perspective. I’d say if you were to split it percent, self-help is 60, 70% of that, and then the rest would be mix.

Got it, thanks. I’ll turn it back.

Our next question comes from Eric Stine with Craig Hallum.

Hi Jill, hi John.

Hey Eric.

Just wanted to talk about you’re targeting the $1 billion big LNG awards, and I think on Page 2 of the release you talked about second half. Given the timing or how you see things playing out, it’s fair to say that that does not include Driftwood, and then if that is the case, if my math is right, that means that there is something else in there that you are seeing beyond Corpus Christi Stage 3 and Plaquemines. Any color there would be helpful.

Sure. The billion we see includes Phase 1 of Driftwood for about $375 million to $400 million, which would be booked--we expect to be booked in late Q2 of 2020. We do have others on the horizon but from a level of confidence perspective, these are the ones that we feel have the best opportunity to FID in the timeframe we’ve laid out. But if you took the full gamut of the projects that we know we have content on, this number is considerably higher than what’s shown here.

Okay, that’s helpful. Then just wanted to turn to India quickly. I know you’ve got your line with IOCL and AG&P. Curious, I know that the government has, I believe it’s 250 designated areas that they are looking to build out in the country, and curious--I mean, your two current partners, what their coverage is of that--of those areas, and then just curious what your ultimate plans are in terms of how many partners would you eventually like.

There are seven--you’re correct, there is actually 300 city gas licenses that are out there right now. There are seven, “developers”, two of them being AG&P and IOCL, that have the majority of the gas network regions. IOCL and AG&P probably--I would say out of the total 300 would be in the 40 to 50, somewhere in that range of having ownership of the licenses. Our target on India would be to have two other partners as well that would cover more of the city gas network, but what we are finding is that actually if that doesn’t happen from an MOU perspective, it’s actually happening through some of the other activity in the market. For example, the Exxon Mobile announcement this week of their MOU with IOCL, they have other areas that they’re developing and they’re looking to go to, so there’s other avenues that we’re having exposure to some of these city gas network regions.

Okay, thanks a lot.

Thank you.

Our next question comes from Rob Brown with Lake Street Capital.

Good morning.

Hey Rob.

Another question on your 2020 outlook. I think you took the Air-X business down quite a bit. How is the visibility there, what’s the backlog, and how would you characterize the risk in that business at this point?

I think we have taken it down to what I would consider to be a very conservative view for 2020. What we’re hearing from our customers directly is that this is not a cliff type of situation, that there’s been a little softening in the last few months. We haven’t seen a dramatic drop-off ourselves in order activity that would say that we should go any further own on our outlook on revenue. The customers are telling us--we have a couple big customers telling us they’re seeing 2020 look just like 2019, which is a tad bit of a surprise given what you hear in the market; then we have a few other customers saying we expect January for everything to take back off. So the sentiment of our customer base is actually more positive than what you’re hearing in the market in the areas that Air-X-Changers plays, so we have taken a fairly conservative view on the revenue side and associated earnings with that. I would want to make one other point, is that when we did the Air-X-Changers acquisition, we understood where the point in the revenue cycle, etc., so all the things that we said about Air-X-Changers when we bought it still ring true - gross margin accretive out of the gate. Q3 was nearly 31% gross margin in that business directly accretive to it. ROIC 13% by Year 2, we still see that happening.

Okay, great. Then maybe some more color on the additional $9 million in cost synergies that you identified here, what does that consist of and what’s the timing of that?

We have identified additional opportunities in terms of where we make what and taking costs out there, leveraging our Mexico JV for certain aspects of the building. We have already in the bag additional sourcing savings that we have not--we hadn’t previously included in our model, and last but probably not least is the reductions around how quickly we were able to streamline some of the moves in the facility consolidations and understand what we can do in terms of better performance, shorter lead times and with less infrastructure.

Great, thank you. I’ll turn it over.

Thanks.

Our next question comes from John Walsh with Credit Suisse.

Good morning. I guess a question around the balance sheet and the free cash flow. Obviously you had very strong conversion in the quarter, so a good cash quarter there. I think the leverage, you’re still--at least last quarter, you’re still sitting at north of 3. What’s the priority right now as you think about capital allocation and where the balance sheet sits?

Our net leverage came down to about 3.22 at the end of Q3. Our priority is to get that net leverage down in the 2s. We expect that it will be at 2.5 by midyear of 2020 and it’ll decline very quickly thereafter, in particular around some of the big LNG cash flows coming in. Already in Q4, we had a very strong first week of collections just in the organic business as well, so you won’t see us go and do a large M&A style deal, we’re just going to drive the debt down.

Got you. Looking at Slide 16, I don’t know if this is math we can do because we’re just dealing with parts of the projects and whole numbers and ranges here, but did anything move in terms of the mix? As I look at some of those projects you call out, if I try to back into what the implied margin is just using your tax rate and your share count, they are moving around a little bit, so I don’t know if there was just some mix to call out or if that’s not actually math we can do because these are just meant to be representative ranges of what could play out in that year.

Yes, it’s more the latter. You won’t be able to do that math, and there’s a couple reasons for that. We do peanut butter spread certain things so we don’t give our customers’ margins directly away, and a lot of that also relates to what’s the content on a project, does it have a heavy hydrocarbon removal system, does it have this structure, does it have technology, so you wouldn’t be getting there if you try to back into it using Slide 16. The other thing I would point out on that slide is the prior look started off of a base outlook from our June of 2018 investor day for 2020, so it was from a while back and then we walked it in May to get to a range, an early 2019 look at 2020. The current look walks from our expected 2019 up to 2020, so there’s a difference in share numbers, there’s all kind of moving pieces that went into this.

Okay, great. Appreciate the color, thank you.

Our next question comes from Patrick [indiscernible] with JP Morgan.

Hi, good morning Jill, good morning John. Thanks for taking my call. Just had a couple follow-ups on that Slide 16. If you could help me understand the walk. It seems like from the 1380 to 1400, the old base to the new 1615 to 1680, I’m guessing that Harsco, that 270 to 275 came down to something in the low 200s just annualizing your number there, and then I’m guessing the delta to get you to the new number, if that’s true, is also a little bit of softness in the base business. Just want to confirm what kind of absolute revenue number you’re expecting for the Harsco business next year in the guide, and I think you said it’s conservative so I’m guessing it’s probably around where I just said, and then what’s causing the lower base business number, if you could point to any specific areas or end markets, that’d be helpful.

On the Harsco Air-X-Changers business, we have it modeled between 190 and 200 on the revenue side, and then with respect to comparing the base business, I’m not sure you can really do that from looking at the prior versus the current because they are two different walks. We don’t have softness in the base business, we’re still seeing that 15% growth including Calcasieu, and the margin mix is a blended look here.

Okay, I can follow up with that after. Maybe just asked directly on margins, what are you guys assuming for margins in 2020 on the base case outlook?

In terms of gross margins in 2020, we’re averaged about 30% for the business.

And then for operating margins?

Just over 12%.

Okay, that’s helpful. Any update on the free cash flow outlook for 2019 and then 2020, if possible to give kind of an early view on that?

We don’t guide to the free cash flow outlook, but you can use Q3 as a proxy for Q4 and probably a little bit better than that. With respect to 2020, the cash flow is going to be--you can take 2019 as the base and then you can add a piece of the Calcasieu project, so you can say about 50% of the Calcasieu project comes in by the first half of the year and then another 25% cash comes by the end of the year.

Okay, got it. I may have missed this at the beginning, but at least versus our estimates, I think D&S West was a little bit softer than we were modeling. Maybe we just mis-modeled it, but just curious what you’re seeing there, if it was in line with your expectations or deviated at all. Again, it could be just us mis-modeling it, for the quarter I’m talking about.

For the quarter, are you talking about order standpoint or a margin standpoint?

I was just talking about revenue and margin versus our numbers, it was a little bit softer. I don’t know what your estimates were going into the quarter, so it’s tough to say how it fell versus your own expectations. Just curious if you could provide any color on that.

Yes, D&S West was, I would say, average for the quarter in terms of our expectations, so it didn’t blow the roof off but it wasn’t an epic failure. From the standpoint of any of the drivers, that created a little softness versus what you might have had. I don’t know what your number was, but there were two things that were timing related. One is we had a specific negotiation happening in July and August that created timing on orders for one major customer that we expect those orders to be in Q4 versus Q3. Then the other piece is we had a little bit of hold on China-related activity in D&S West. In particular, and it’s not a big number, but we had about $3 million of cryo-bio related product that is being held and can’t go into the country until the tariff situation is resolved, and that’s at about 50% margin, so a little bit of impact there to your gross margin number.

Got it, helpful color. Then last one, if I could squeeze one in, just clean-up, the other income you reported in the quarter in the P&L, what is that? There’s $3 million of other income.

We have certain mark-to-market activity that goes through there. There’s certain related activity from joint ventures that we have, so it’s not anything--there’s not anything unusual in there. It’s just standard activity in terms of JVs and mark-to-market.

Okay, so that’s included in the $0.77? I just need to get familiar with how you guys are--the adjusted framework, that’s included in that $0.77?

That’s included in there, yes.

Okay, that’s helpful. Thanks for the time, appreciate it.

Our next question comes from Walter Liptak with Seaport Global.

Thanks, good morning. I wanted to ask a follow-on question to the fourth quarter and just understand the timing issue with the big LNG projects. I wonder if we’ve learned anything, if we should expect timing to change for Venture Global in 2020, can this shift around from quarter to quarter, and if there’s anything on percentage of completion that we should be thinking about as that revenue starts to flow through the income statement.

Until we have a specific project timeline from the customers themselves, anything we give on big LNG is an estimate of timing, so let me be explicitly clear that while--we have a project schedule on Calcasieu, we won’t expect that to change, but until we have project schedules on anything else, there is the possibility they do move.

Okay. The 2020 guidance, when we’re thinking about the low end, it went down to $4.75 from $5.05 at the low end. How did you create that range to get to the low end? Where would we see the incremental negatives? Is it around the compressed natural gas in Air-X or is it around timing of big LNG? Where is the risk?

Let me just step back. I think you’re trying to walk from the prior, which was based off of June 2018’s original. We put an early look in May of 2020 out, and the world has considerably changed since May in terms of the macroeconomic situation, so I’m actually pretty darn pleased that we’re plus or minus 5% to what we said in May for the following year. From the walk, go back to Page 16 and that’s exactly where we are right now and how we think about going off of 2019 to 2020. It’s not looking at $5.05 versus $4.75, it’s here’s where we sit today as of 2019 and here’s how we get to 2020. A range is a range. There’s a lot of things that go into a range. I think there’s a misperception that you should take the midpoint all the time. There’s things that can happen to get you to the low end, things that go to the high end, so we feel like $4.75 is the low end and pretty darn conservative, and $5.25 would be the start of the line based on where we sit right now.

Okay, fair enough. In the press release and some of your commentary, you talked about the strong September. I wonder if you can identify what the timing issue was. Was it around trade-related things or was it just end of the quarter timing and trying to get orders booked?

No, actually I viewed it as a pretty positive sign because it’s atypical that in the third quarter, that the last month of the quarter is the strongest. There’s a piece of that that goes to my comment from the prior question, that July and August we were in some negotiations on extending agreements, etc., where orders slowed until those agreements were completed ,so there’s probably a little bit of that in September, but other than that it’s just we’re seeing good trends. In October to date, I’m very, very pleased with the first to the 16th order activity.

Okay, great. Okay, thank you.

Our next question comes from Tom Hayes with Northcoast Research.

Good morning, thanks for taking my questions. Just real quickly, Jill, maybe on the over the road trucking opportunity, does that still remain primarily an European opportunity or is that starting to expand in the U.S. as well?

It’s still primarily European, Tom. The two other geographies that we’ve done a lot of legwork on are India and Japan. Our fingers are crossed that one customer in particular in Asia starts doing commercial production in late 2020, so we have a little bit of line of sight to that but nothing that we’re able to share yet The brunt of 2020 will still be Europe.

Okay. Then maybe on the small scale opportunities, because we’ve spent a lot of time talking about that today, if you could just remind us as far as the timeline from a backlog perspective through the P&L, I know the large LNG projects could be multiple years, so if you could just kind of reference what a small scale project may look like as far as timeline.

The average timeline for an operator to get a small scale facility up historically has been 16 months from start to finish. These operators are trying to do it a lot faster. In some cases we’re quoting on things that are nine to 12 months in length, so I think you’re going to see that get shorter and shorter. For us, the average is about nine months from order to completion of our part of it.

And you guys still use percentage of completion accounting for the small scale projects?

Depending on the size of the project and the construction, yes.

Okay. All right, thank you.

Our next question comes from Pavel Molchanov with Raymond James.

Thanks for taking the question. Given that following the Harsco deal, you have much greater leverage to the North American oilfield activity arena than before, I’m curious if you’ve thought about a sensitivity to oil prices, for example if WTI increases by $5, $10, what kind of revenue uplift, all else being equal, should people expect under that type of scenario?

Pavel, this is John. The overall revenue that that’s contributing to the segment is still--and frankly to the company, is still quite small, and so we don’t see it really shifting things materially one way or the other. The business actually tends to shift with respect to natural gas production, some of which is driven by oil price growth, but generally we just don’t think that that analysis is going to be something that dictates how the business ultimately flows. When you see an increase in natural gas production, that incremental growth will drive a little bit more activity levels for us, but we have actually been impressed the way that the business has held in now without natural gas production growth growing as much, so I’m not sure that ultimately that sensitivity analysis is going to give you guys any more predictability just given the relative size and the fact that the business doesn’t quite move like that.

Okay. In relation to the three upside scenario large projects that you’ve outlined for 2020, do any of those, to your knowledge, depend on a resolution of the Chinese tariff on U.S. LNG?

None of them. All have stated that they’re not dependent on the China resolution.

Okay, very helpful. Thanks.

Our next question comes from Craig Shere with Tuohy Brothers.

Good morning, thanks for fitting me in. Slide 15 is very helpful. I have two questions on that. The first is specialty market growth in 2020 seems to kind of sidestep potential longer term breakout in a couple of your business lines that could eventually be $100 million-plus revenue each. Are we just being conservative with the 11% growth in 2020 or is 2020 just too early to see material traction on some of these nascent markets?

We’re being conservative on specialty markets. We’ve tried to give a down the middle total guide for 2020, so that’s an area that certainly has more potential than what we’ve built in.

Great, and then in terms of the add-on to the base case on Slide 15, a number of investors have expressed to us some skepticism about Driftwood, Plaquemines or Magnolia in 2020. There’s various opinions about that. If we assume that just worst case doesn’t happen for now, if we think about Corpus Stage 3, Freeport Train 4 content and other large global FID projects where you could have content on many of them, small scale LNG growth that could be in advance of what’s in your base case, and also what you mentioned on the call about improvements in existing large scale liquefaction facilities, helping them with their processes, could all of this kind of nickels and dimes some a bit more total to maybe $100 million revenue in 2020, even without those huge projects?

Yes, those other scenarios could total to around that range, certainly.

And that would be additive to that Slide 15?

That would be additive, yes.

Great, thank you.

I’m not showing any further questions at this time. I’d like to turn the call back over to Jill Evanko.

Thanks. As you heard today, we are extremely bullish on the coming years’ global infrastructure build-out for LNG as well as excited about the longer up cycle resulting from the unique timing of our order book serving big LNG. I want to conclude not only by thanking all of our global team members at our 27 locations for executing the quarter results but also to share what is an exciting news headline for the Chart Industries of today and the future, as shown on Slide 18. Our very own Kim Van of Energy and Chemicals Fin-Fans won our contest, which had 378 suggested slogans that best describe Chart to our stakeholders. Going forward, we hope you come to know Chart as Cooler By Design. Thank you all for your time today, and goodbye.

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day.