Good morning, and welcome to the Chart Industries, Inc. Third Quarter 2018 Conference Call. All lines have been placed on mute to prevent 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 using Chart's Web site at www.chartindustries.com. A telephone replay of today's broadcast will be available following the conclusion of the call until Thursday, October 25, 2018. The replay information is contained in the company's press release. Before we begin, the company would like to remind you that statements made during this call that are not historical in fact are forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied in the forward-looking statements. Please refer to the information regarding forward-looking statements and risk factors 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 Web site or through the SEC Web site, www.sec.gov. The company undertakes no obligation to update publicly or revise any forward-looking statements. I would now like to turn the conference call over to Jill Evanko, Chart Industries' CEO.

Thank you, Gigi. Good morning and thank you for joining us to walk through our third quarter 2018 results. We will also discuss our updated increased 2018 guidance reflecting the movement of our oxygen-related products into discontinued operations and a 2019 first look. In order to facilitate today’s discussion, I will walk through the slides included in the presentation release this morning. We will walk through the adjusted EPS in a few slides but first I would like to provide commentary around the order and sales activity. We have seen accelerated dynamics of growth in the market, in particular in LNG, as shown on Page 2 of the supplemental deck. Before we get into the numbers, during the third quarter we strategically realigned the business to support and focus on our core growing Energy & Chemicals and Distribution & Storage businesses. We announced the completion of our strategic review of the oxygen-related products with a definitive agreement to sell CAIRE Medical to NGK for over $130 million, a gain on the sale, and an expected fourth quarter of 2018 close. In that regard, we moved out of this non-core business to better leverage our core cryogenic expertise. We also announced the signing of a definitive agreement to purchase VRV, a diversified multinational corporation that designs and manufactures pressure equipment serving the Cryogenic and Energy & Petrochemical end markets. This acquisition is expected to add initial annual net sales of $120 million, achieve significant cost synergies related to operational efficiencies and sourcing, and close in the fourth quarter of 2018. For the purposes of our third quarter and year-to-date 2018 results, CAIRE results are shown in discontinued operations. The third quarter of 2018 sales of $272.2 million grew 34% or 16% organically over the third quarter of 2017, driven by strength…

[Operator Instructions]. Our first question is from Eric Stine from Craig-Hallum. Your line is now open.

Good morning, Jill.

Hi, Eric.

Hi. So I just wanted to start with IPSMR and the initial technical evaluation, just wondering if you could – as much as you’re able to share talk about the potential size of a project that might be under consideration, your history with this customer or the pipeline of that customer?

Yes, absolutely. So I’m fairly well constrained on what I can say with respect to this but just a little bit of color by way of background is we have worked with our customers over the last three to four years to vet and validate the IPSMR process technology. In so doing, it also compares to other process technologies in terms of efficiency and capital cost. And through a very rigorous process with this particular oil and gas major, we’ve been able to at least get on to the potential for future projects which opens our market up on IPSMR to not only U.S. – further U.S. projects but also projects outside of the U.S. I can’t put a size to that. Again, I’m fairly constrained on what I can say but it is significant movement for us and reiterate the market view toward IPSMR.

Got it. I guess it was worth a shot but thank you for that. And then maybe on the LNG project list versus what you gave at the Analyst Day, it definitely is more – build out more expansive. Just curious, does that now include Hudson’s potential content? I know at the Analyst Day it did not. Anything there?

The current view that you see in today’s deck also does not include Hudson content, so we’re specifically going to call that out going forward. Hudson content generally on each of these projects ranges between 5% and 10% of Chart legacy content, so there’s additional somewhere between 20 million and 100 million per project.

Got it, okay. And then maybe last one for me just China. I know on previous calls, clearly Europe was very strong this quarter but has been strong for some time. In China I think you were a little more subdued in terms of trends there and that seems like – well you definitely saw an uptick this quarter. So just curious, do you view that as sustainable? And then maybe just a comment on the profitability in that segment since I know that’s a factor in the tax rate for next year.

Absolutely. So as we’ve said the last two earnings calls cautiously optimistic and I would say slightly more positive than cautiously optimistic given the last four quarters order trends from Q4 '17 to Q3 '18, this is our highest quarter considerably on the order side. Backlog continues to grow sequentially. Operating income is positive which is what we needed for the tax rate to be benefitted in 2019. So I would say from a market perspective within the region, we’re more positive than we have been in the last two quarters still with an element of cautiousness to it. But the operation itself is performing from a manufacturing and an operating income standpoint which sets us up well for 2019.

Okay. Thanks, Jill.

Thanks, Eric.

Thank you. Our next question is from Rob Brown from Lake Street Capital Markets. Your line is now open.

Good morning, Jill.

Hi, Rob.

First on the LNG orders that you could get in 2019, could you give us a range of what that could do to 2019 revenue if some of those start to hit?

Yes, absolutely. So the range on that would be between 300 million and 700 million to 2019 revenue. And then obviously across – those aren’t – they’re projects in their entirety. That revenue generally spread between two and three years based on how it’s recognized. So the 300 to 700 would be a piece of a few different projects, orders that would come in, in the first half of the year.

So backlog would go up by 300 to 700 and then the revenue would go up by sort of a third of that, okay.

Correct.

And then maybe on the 80/20 effort that you talked about a little bit, you started some work on the D&S West and opportunities for the D&S East, but could you give us a sense of sort of where that’s – what you see for opportunities and maybe some sense of impact?

Yes. So we see quite a bit of opportunity both in D&S West and D&S East. From a D&S East perspective a lot of our opportunities are around LNG fueling and over-the-road trucking that we continue to see strength in. Let me step back to each of those respectively. From a vehicle tank standpoint which is related to the LNG over-the-road trucking, we’ve seen consistent growth in our order trends over the last seven quarters which really those orders started at the beginning of 2017 and have grown sequentially. We also thought our discussions with the key customers in that space have a decent line of sight to the next three years of revenue commitments that we expect to see both in the market as well as with Chart content. So that’s a key area of potential further growth. On the LNG fueling side as well as the shipbuilding and marine bunkering opportunities which we kind of view as those three together, we see considerable pipeline activity for projects which as a reminder the range of revenue projects for us per project is somewhere between $10 million and $30 million per one of these bunkering projects. And we would anticipate to receive out of our current request for quote backlog, we’d expect to receive one of these projects in 2019. And I will caveat, our guidance for 2019 does not include that one project. So we’ve kind of gone toward the conservative end of our 2019 guidance. So we’re continuing to build upon that. All of this conversation really is around our organic opportunities, so we see further penetration of the market in the geographic regions that we will get through the VRV acquisition and certainly have spoken about those over the last three to four weeks. On the D&S West side, we continue to build out our full solution offering for industrial gas customers which is something that they’re very interested in and having a service and repair piece of the business be part of our longer term agreements. And we see continued growth on our parts, repair service side of the business as well as considerable growth in the gross margin side of that business. So we’re excited to continue to build on that full solution offering for our key customers there. And then all of this market opportunity is underpinned by the operational excellence in 80/20 processes that we’re working on starting in the D&S both West and East that will allow us to further leverage margin on these additional volume opportunities.

That was a great overview. Thank you. I’ll turn it over.

Thanks, Rob.

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

Good morning. Congratulations on the quarter.

Hi, Marty. Thank you.

Could you talk maybe a little bit about working capital, cash usage and your expectation on the free cash flow generation and timing there?

Yes, absolutely. So working capital continues to improve and it is stepping back from the change in our strategic realignment where we divested the CAIRE business. One of the reasons that we did the divestiture was that it’s not like our other core assets. And working capital was one of those elements where as a percent of sales it’s considerably higher than the core Chart business. So the remaining continuing ops business runs between 15% and 16% of sales from a working capital perspective. And we will continue to expect to see that improve in 2019. A big driver of the improvement on the horizon is through these larger projects in the E&C business for which we received cash upfront on a material standpoint and drives working capital down, if not in some cases negative. We expect further free cash flow generation in 2019 to be kind of in that $75 million to $100 million range. And then there’s on top of that the VRV cash that will be generating which VRV historically generates about 10% of revenue from a free cash flow standpoint.

Great. And then on IMO 2020 and opportunities outside of Europe related to that, could you maybe talk about the status of some of the customer conversations that you’re having? And also is it – will we potentially see small scale or midscale liquefaction facilities in conjunction with a bunkering facility?

So let me take your second piece of the question first that is there is potential for that. To date we have not seen that but there is conversation in the market around that being a secondary step in the bunkering. For the time being what we see in terms of what we’re quoting on is more around our tanks and the storage for the bunkering applications. In terms of the pipeline that we see, as I briefly touched on, there is five in our pipeline right now and all of them are European based in various different port locations. And they vary in size but the max project for us in 2019 would be a €30 million project.

Great. Thank you.

Thank you.

Thank you. Our next question is from Tom Hayes from Northcoast Research. Your line is now open.

Thanks. Good morning, Jill.

Hi, Tom.

I just wondered if maybe we could circle back and maybe discuss the margin differences between the D&S West and the D&S East and your thoughts on how you could narrow the gap.

Absolutely. So D&S West reported gross margin as a percent of sales for this quarter of 37.6% and East of 19.7%. The biggest driver of the differential is China in current state. While China is now operating income positive, gross margins still are running in that mid-teens range and that’s pretty typical for what we’re going to continue to see in that region. It is certainly a much more pricing competitive region. Where the opportunity resides for us is in Europe and not only from a self-help perspective but also from additional volume that’s going to come through our facilities. We do have more opportunity in terms of where we strategically manufacture given the addition of VRV. And with the addition of India manufacturing to our portfolio through VRV, the cost of manufacturing there is somewhere in the $8 an hour range for a direct labor person. So we have opportunity to manufacture and be more strategic on that. I would point out that the delta in gross margin as a percent of sales in the East between the second quarter and the third quarter was approximately 300 basis points decline. The driver of that was in the second quarter. We completed a mechanical evaluation on our large project in the East and we were able to release the contingency reserve that was associated with that large project and that was a big driver of the sequential decline.

Okay, great.

And we’ve been able to close that gap somewhat.

Maybe just talk about the service revenue component in the quarter and your thoughts for contribution in 2019.

Absolutely. So – and Tom let me just ask a clarifying question. You’re talking about on the D&S side of the business?

Yes.

Okay. So the parts, repair service business in D&S increased 17% year-over-year from a revenue perspective and gross margin increased just under 200 basis points sequentially. So we’re seeing good movement there. With the kind of total view for the year on the D&S PRS side is somewhere between $50 million and $60 million of sales. And the gross margin in that business will continue to rise kind of in that. Right now, it runs in the 30% gross margin as a percent of sales. We expect that to grow considerably in 2018 given some of the internal actions that we are undertaking to structure and repair in the right locations geographically.

Great. Thank you.

Thank you. Our next question is from Walter Liptak from Seaport Global. Your line is now open.

Hi. Thanks. Good morning, Jill.

Good morning, Walt.

Congratulations on getting a lot of work done this quarter.

Thank you.

And my two questions are follow ups. Just wanted to clarify on the IPSMR technology with large integrated, so the customer that did that technology review is not listed on Slide 52. Is that correct? So this would be a new customer opportunity for you in the future?

Correct.

Okay, great. And then the follow up on 80/20, I know you’re in the early stages of doing 80/20 but can you give us an idea of just a framework of what to expect in terms of maybe margin improvement in D&S East and D&S West, over what time period and what kind of contribution do you think you would get from it early on like in 2019?

Yes. So on the D&S West side, we have an internal target that’s greater than what I’m going to share with you, but from a commitment standpoint we’re committed to 150 basis point margin improvement from 80/20 in D&S West by the end of 2019. On the D&S East side, we’re very, very early days in terms of understanding information and data but I would put an early number out that’s very similar to D&S West and expect that to turn into more, but part of this evaluation is both our current business and then once we close on the VRV acquisition involving them in the 80/20 process as well.

Okay, understood. And then ultimately with 80/20 that usually gains momentum beyond first year, three to five years. Do you have an idea of what our expectation should be three or five years out for margin improvement?

I have an idea but we’re not yet prepared to share that with respect to the 80/20. But certainly agree with the comment that we expect three to five years as a result of this process to grow considerably.

Okay, great. All right. Thank you.

Thank you.

Thank you. Our next question is from Matt Trusz from G. Research. Your line is now open.

Good morning, Jill. Thank you for taking the question.

Hi, Matt.

Just a follow up on revenue recognition protocol for the LNG projects that take off next year. How do you account for the equipment component? How do you account for the technology license? And then can you just elaborate further on the cash flow profile as far as prepayments and progress payments you might receive?

Absolutely. So the technology fee is recognized across the equipment order. So the way that works is it’s spread – if it’s in order that’s going to take us three years to fulfill the equipment side. The technology fee is across the equipment order life, so generally two to three years. The way that these tend to roll out and obviously depends on the way that the orders are placed. But if we were to get a $500 million order in mid-2019, we would expect kind of 100 million and then 200 million, 200 million. So fairly evenly spread. It’s really based around the delivery on the brazed as well as the cold boxes. With respect to the cash, the technology fee is dependent upon the negotiation respectively to each project but we anticipate that for certain projects that we’ve spoken about, we would receive the technology fee cash upfront whereas the margins are recognized across the equipment cycle. And then with respect to the rest of the equipment team and from a cash standpoint, we expect to receive the material cash, so payment cost-for-cost on material for the projects at the point with which we order the material. And that was my earlier comment with respect to working capital further improvement around the timing of these projects. And then the rest of the cash unrelated to material comes on regular terms and those are negotiated project-by-project and range between 30 and 60 days.

Great. Thank you. And then to follow up, there was a question asked about the D&S aftermarket business. Can you provide the same level of detail for E&C as far as sizing and growth opportunity next year?

Yes, absolutely. E&C just for clarifying purposes we call that lifecycle in the service and repair side of the business with the inclusion of Hudson aftermarket and the Hetsco deal that we did in 2017, we’d be looking around 70 million to 80 million in terms of the annual revenue next year. On a margin profile standpoint that’s more in the 45% to 50% gross margin as a percent of sales.

Great. Thank you.

Thanks, Matt.

Thank you. Our next question is from Pavel Molchanov from Raymond James. Your line is now open.

Thanks for taking my question. I wanted to ask about one of the facets of small scale opportunities. This is onshore U.S. in places like the Niobrara and perhaps Permian as well. I think the last time you guys talked a lot about this was probably back in 2014, back in the days of $100 oil. Now that we’re seeing more and more associated gas supply as drilling activity recovers, are you seeing any inbound interest from E&P companies to essentially liquefy gas for transportation fuel or other purposes?

We’re seeing very little of that. Periodically we get an inbound on that but it’s not by any stretch consistent.

Okay. And along those lines, are you currently deriving any revenue from LNG or any other opportunities tied to drilling in Colorado? And I ask this of course in the context of the drilling referendum on November the 6th.

Yes, we have some revenue associated with that but very little. The majority of our revenue from natural gas processing and drilling perspective is in the Permian, a little bit in SCOOP and STACK and a little bit in Marcellus.

Okay, clear enough. I appreciate it.

Thanks, Pavel.

Thank you. At this time, I am showing no further questions. I would like to turn the call back over to Jill Evanko for closing remarks.

Thank you all for joining us today. Our strategic actions in third quarter to refocus on our core cryogenic expertise and products coupled with our execution on margin expansion supports the steadily growing base businesses of D&S and E&C. Additionally, the segment realignment and the operational focus will support the upcoming large LNG cycle and margin expansion. I also want to thank all of our Chart team members for their continued efforts to execute and continue to build our culture. We look forward to sharing updates on the closing of both the divestiture of CAIRE and acquisition of VRV in the fourth quarter. Thanks again for joining us today. Goodbye.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect.