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Edited Transcript of GTLS earnings conference call or presentation 18-Apr-19 1:30pm GMT

Q1 2019 Chart Industries Inc Earnings Call

GARFIELD HEIGHTS Apr 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Chart Industries Inc earnings conference call or presentation Thursday, April 18, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey R. Lass

Chart Industries, Inc. - VP & CFO

* Jillian C. Evanko

Chart Industries, Inc. - CEO, President & Director

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Conference Call Participants

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* Eric Andrew Stine

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* James Carlyle West

Evercore ISI Institutional Equities, Research Division - Senior MD

* John Sturges

* Martin Whittier Malloy

Johnson Rice & Company, L.L.C., Research Division - Director of Research

* Matthew A. Trusz

G. Research, LLC - Research Analyst

* Pavel S. Molchanov

Raymond James & Associates, Inc., Research Division - Energy Analyst

* Robert Duncan Brown

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Thomas Lloyd Hayes

Northcoast Research Partners, LLC - MD & Senior Research Analyst

* Walter Scott Liptak

Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst

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Presentation

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Operator [1]

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Good morning and welcome to the Chart Industries Inc. 2019 First Quarter Conference Call. (Operator Instructions) 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 will be available following the conclusion of the call until Thursday, April 25, 2019. 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. 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 statement.

I would now like to turn the conference over to Jill Evanko, Chart Industries' CEO.

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [2]

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Thank you, Sherie, and thank, everyone, for joining us to walk through our first quarter 2019 results and outlook. Given the high-level of order activity since the first of the year across the business, I will begin by walking through each segment's order levels with specific market trends and significant orders received year-to-date.

As many of you are aware, one of the unique elements of the Chart businesses is that we are an industrial manufacturing company with a complementary energy and LNG play. We participate in many aspects of LNG infrastructure, not just export terminal builds, but across liquefaction, storage and transport globally. You will hear that theme throughout our comments about the first quarter results as we continue to see strong demand globally for both the Energy & Chemicals and Distribution & Storage products.

As I've mentioned over the past 6 months, one of the exciting things about our business is how much margin opportunity exists within our control to execute. I will discuss the actions completed in Q1 that will generate over $6.5 million of anticipated incremental annualized operating income and how those actions, combined with the order activity in the first quarter, inclusive of big LNG, increased our full year 2019 revenue and adjusted EPS guidance. Then Jeff Lass, our CFO, will provide specifics on the first quarter financial results.

Beginning on Slide 2 of the supplemental deck, which was released this morning, total orders for the first quarter were $461 million, an increase of 60% over the first quarter of 2018 and a 69% increase sequentially over the fourth quarter of 2018.

Backlog is $733.8 million, 54% higher than the first quarter of 2018 and 29% higher than the fourth quarter of 2018. The last time backlog was at this level was the third quarter of 2014, which not only included $105 million of large LNG projects such as Wheatstone, it also included record China backlog of $221 million compared to $55 million of China backlog today.

E&C orders of $264 million included $135 million for Venture Global's Calcasieu Pass project as well as a $20 million order for Golar's next floating LNG vessel, Gimi.

Additionally, just yesterday, we received notice that we won a $30 million order for air-cooled heat exchangers on another big LNG project with Bechtel as the EPC.

Q1 was high-activity quarter for big LNG with FERC making positive forward moves and several announcements toward FID from the export terminal operators. FERC issued 5 statements and orders in the first quarter, including 1 approval order and 3 final environmental statements, and already issued 2 more final EISs in April. The last few quarters have seen the highest level of FERC EIS-related announcements since liquefaction projects started to be developed in the U.S. nearly 10 years ago. I will walk through big LNG specifics as well as additional 2019 order opportunities on the next slide, but first, many other aspects of each segment had strength in the first quarter.

As we mentioned on the February call, in the Energy & Chemicals segment, we received an equipment order for $9 million for SABIC's Saudi Arabian petrochemical plant, a $7 million order for a large customer's Gulf Coast fractionation train and an additional $4.4 million order for air-cooled heat exchangers. Since that call, we booked an additional $7 million order for nat gas processing equipment in Q1. And already in Q2, we booked a $9.3 million order for an air separation application.

One of the pleasant surprises we have had after owning VRV for 4 months is the amount of interest in our legacy E&C products in places that we previously didn't have exposure. There's $27 million of E&C quoting activity underway for projects to which we previously did not have access, either because we did not have a product offering in the region or because we didn't have a relationship with the particular customer.

Additionally, we have identified a significant E&C synergy where we will utilize VRV's integrated solution of scrubber columns and internal vessels to replace purchased components in one of the big LNG projects that is included in our expected 2019 order pipeline.

In total, VRV orders in the first quarter were $25.5 million. $12.7 million of the VRV order activity was in the D&S East segment, contributing to total orders of $83.2 million, up 20% over the fourth quarter of 2018 or 16% organically.

Strength in LNG systems, trailers and packaged gas continues in the region. With the suspension of tolls for natural gas trucks in 2019 and 2020 in Germany, there is visible strong interest in our quoting pipeline. Specifically, we received our first order for the first LNG fueling station from a customer in Germany in the beginning of April, and there are 16 additional stations planned in Germany between now and the end of 2020. Building upon our new geographic market of India, which was opened up to us through the acquisition of VRV, we announced in mid-March that we signed an MOU with Indian Oil Corporation to work together to develop the LNG market in India. Resulting from the VRV acquisition, we are already bidding on $11.5 million of LNG and industrial gas-related projects in India and booked $3.9 million in orders in the first quarter for D&S East products, including tanks, trailers, MicroBulk and vaporizers.

Distribution & Storage Western Hemisphere orders of $114 million were down 12.6% from the first quarter of 2018, which was the highest-order quarter in the history of the D&S West business, yet continue to be strong. By way of comparison, the average order level for the past 8 quarters was $112 million for D&S West and included 2 record quarters, both above $126 million.

Sales and order activity for over-the-road trucking LNG fueling systems continues to increase with sales of $17.7 million, up 68% from the first quarter of 2018 and a 63% increase over the fourth quarter of 2018. We're excited to announce that in the quarter, we have successfully negotiated sole-source long-term agreements with 2 of our key over-the-road trucking customers. Both agreements have multiple-year durations and double-digit growth anticipated in each year. While these customers are in the Eastern Hemisphere, we currently produce the units in Georgia and therefore, the results are reported through our D&S West segment.

In D&S West, approximately 40% of revenue relates to our traditional industrial gas customers, which are mainly on long-term agreements of varying lengths. We are pleased to continue to offer innovative solutions to these core strategic customers and in so doing, are able to extend the agreements. Specifically, we signed a master set of terms and conditions with one of our key industrial gas customers to govern our global activity and extended another industrial gas customer for 2 additional years.

Also in the quarter, we received our first order totaling $850,000 for a liquid hydrogen vehicle fueling station for passenger cars in California. Hydrogen is an area of fast growth, and it's part of our specialty markets focus in D&S West. Hydrogen as a fuel is being used primarily in on-road light-duty vehicles called fuel-cell electric vehicles, or FCEVs. While hydrogen fueling stations exist elsewhere in the world, and many of those supplied by liquid hydrogen utilize our bulk tanks, it is fairly new in California. The state is pushing to become a carbon-neutral economy by 2025, and under an executive order has set a development target of 200 stations to be completed by 2025. The state is supporting the development of fueling station infrastructure through a series of California Energy Commission grant funding opportunities. 25 stations are funded and are in the process of being permitted, installed and commissioned. And out of those 25, at least 8 are expected to be liquid stations.

Lastly, and with positive impact for the entire business, was last week's news that President Trump signed executive orders to speed up oil and gas projects, including pushing the Federal Railroad Administration to alter the rules to allow the shipment of liquefied natural gas by rail. Not only do these executive orders benefit existing aspects of our business, they would further support our small-scale LNG efforts. Shipment of LNG by rail in the United States has been a topic for many years, and we are prepared to move quickly to take advantage of such a regulatory change. Specifically, we have equipment immediately available for this application, which will be sold under our trademark, GBR, Gas By Rail, brand.

We currently have 2 active proposals for liquid ethylene rail cars, with 2014 being the last time we built and sold these cars. We also believe the railcars will create demand for pump-based loading and unloading skids and stationary storage tanks at delivery points.

Now moving to our perspective on big LNG for 2019 on Slide 3. This slide evolves as we learn more information. I will reiterate that while we focus the list to 10 specific projects, this does not mean that because a project that was on a previously shared slide isn't shown, that we won't have content.

As I mentioned earlier on the call, we booked a Venture Global Calcasieu Pass cold box and associated heat exchanger order for $135 million, which is shown in row one of the slide. This comes on the heels of Venture Global's full site approval by FERC in the first quarter. We are ready to begin production for this order, which is expected to begin imminently in our Wisconsin and Louisiana facilities. We continue to execute on a ramp-up plan to support all of the projects for which we anticipate content in 2019 or 2020 orders. In the first quarter, Venture Global also announced their expansion with BHGE, this system, which includes our cold boxes, to 60 million tons per annum, which would be inclusive of the Plaquemines project. We anticipate Plaquemines will receive FERC approval in the third quarter of this year for 20 million tons per annum.

In the first quarter, we booked a $23 million equipment order for Golar's Gimi floating LNG vessel, which is very similar to our previously provided equipment for the Hilli, the FLNG vessel that has been successfully operating since May of 2018. We expect this revenue to be partially recognized in 2019 and partially in 2020.

On Tuesday, we received full and final notice to proceed on the Gimi project. We anticipate the 2019 revenue portion of these projects to be in the range of $28 million to $30 million, which is included in the updated guidance and assumes current project timing.

The third project on Slide 3 is Tellurian's Driftwood project, which in January, received the final environmental report from FERC. Additionally, at LNG Shanghai in April, Tellurian announced a Heads of Agreement with Total, enhancing their existing relationship both from an equity investment and offtake agreement perspective.

In February, the Driftwood MOU was signed with India's Petronet. Tellurian expects to receive the final FERC order and final investment decision in 2019, and we would expect a notice to proceed on our equipment and IPSMR process technology for the first phase subsequent to that, likely in the third quarter 2019.

The first phase is now expected to be 16.6 million tons per annum compared to the previously assumed 11 million tons per annum. Our content for the first phase of 16.6 MTPA would be IPSMR and equipment orders totaling over $400 million. We expect to -- we continue to expect Cheniere's Corpus Christi Stage III project to move forward in the first quarter of 2020, if not sooner. As a reminder, this project, shown in row 5 of the table, will utilize our IPSMR process technology as well as our equipment.

As I mentioned earlier on the call, this week, we were notified of a $30 million order award for air-cooled heat exchangers on another project which is not listed on this slide, but is well underway. We are working with Bechtel on project timing and therefore, this is not included in our updated guidance.

While we do not show Jordan Cove on the slide, the project received their draft environmental statement from FERC on March 29. If this project moves forward, we expect E&C brazed and air-cooled heat exchanger equipment content.

I mentioned the positive momentum for our products that would result from the President's recent executive orders, one of these being small-scale LNG, of which some of these projects are listed in rows 7, 8 and 10 on this slide. In the past 6 months, there's been increasing activity in small-scale LNG, namely New Fortress's Pennsylvania project and Philadelphia Gas Work's council approval for their utility LNG facility in Passyunk. Just this past Friday, Eagle LNG Partners received their positive final environmental statement from FERC for their small-scale project in Florida to liquefy natural gas for use as a marine fuel and for export, primarily to the Caribbean. We anticipate content on all 3 projects, including the use of our technology for some mentioned herein, along with the use of our equipment. We are strong supporters of the small-scale LNG market as it serves the gas-to-fuel customer versus the mid-scale and baseload export projects. By way of background, we have worked on small-scale terminals for years, including Stabilus' George West, Texas, LNG production facility with liquefaction capacity of over 100,000 gallons per day. The facility has our nitrogen cycle process technology, pretreatment, heat exchangers, cold boxes, truck loading, Vacuum Jacketed Pipe and storage tanks.

Given the first quarter activity on export terminal projects, we are increasing our 2019 order potential for big LNG from our previously stated $400 million to $500 million to $600 million to $800 million. Yet the beauty of our business is that we not only serve the broader LNG spectrum from liquefaction to storage to transport globally, we also have more margin expansion opportunities that are within our control.

In 2018, we restructured the business, which resulted in $2.6 million of annualized savings included in our prior 2019 guide. We continue to pursue the 80/20 process opportunities, in particular in D&S, and previously announced on our February call that we have included over $4 million of savings from our sourcing activities and price increases. Subsequent to that, in the first quarter of 2019, we executed on actions that will result in incremental annualized savings of $6.5 million, of which $3.6 million will be immediately seen in 2019, as shown on Slide 4. These actions included: we announced the consolidation from 4 facilities to 1 facility in our E&C air-cooled heat exchanger business in Tulsa, Oklahoma. While this will take us the better part of 2019, and therefore, the cost savings will not be seen until 2020, it will result in over $1.5 million of hard savings, not including any benefits from reducing transport between facilities and other soft costs. We continue to streamline back-office and consolidate duplicate positions, including absorbing our E&C Lifecycle business back into the OEM operations, which not only reduces unnecessary overhead, it also allows us to better service our energy customers who brought this direct feedback point to our attention over the past 6 months.

The corporate team has spent the past couple of quarters assessing outsource providers, taking vendors out for bid and gaining immediate cost savings, in many cases, without having to switch providers.

Lastly, while not previously announced, the product line rationalization that occurred in the first quarter was for pieces of our Brazed Aluminum Heat Exchanger business that had been produced in China. This was a trial begun 5 years ago, and in that span of time, the business lost at least $1.5 million each year. The capabilities exist in other E&C North American facilities and therefore, we completed the last order in Q1 and have closed this line. It is not a mistake that this is shown in the D&S East row on the slide as it was cost borne by D&S East through 2017, 2018 and Q1 2019, as the Changzhou, China, facility is run by and reported through Distribution & Storage.

With the closure of this E&C line, all the activities in our China facility appropriately report through D&S East. The cost in the quarter associated with these actions totaled $7.4 million, with $5.5 million in cost of goods sold and $1.9 million in SG&A. Jeff will walk through the EPS impact shortly.

I commented that some of our actions come as a direct result of customer feedback. We've been asked more and more frequently to participate in customer and supplier partnerships to create innovative solutions and full-service offerings. As part of this, we continue to innovate and develop first-to-market new products, 2 of which I will highlight today: 1 in E&C and 1 in D&S West, as shown on Slide 5.

In E&C, we introduced Tuf-Lite IV, a highly-efficient axial flow fan, to the market in January. The Tuf-Lite IV offers a wider speed range application and high efficiency in extreme environments, in particular, cooling tower and air-cooled condenser markets. It is engineered for lower-noise applications and brings the following benefits to our customers: a blade count reduction between 2 and 6 for fans operating between certain tip speeds; a reduction in overall sound power levels; between 2% and 5% total efficiency improvement; and between 700 and 2,500 pounds of weight reduction in certain applications. We booked our first Tuf-Lite IV order in January, and it will be delivered in May of this year. This product is another positive to our fans offering, which is higher than traditional E&C gross margins, quicker book-to-bill than the larger project space and has a 40% aftermarket component.

Additionally, this broadens our addressable market for fans, including small-scale LNG, assemblies and retrofits. We will continue to build upon our strong air-cooled heat exchanger and fan business. As we discussed on our February call, specialty markets in D&S West are high-growth products in high-growth markets. Specific applications in our specialty markets are food and beverage, cannabis, lasers, hydrogen and space exploration.

In the first quarter, we booked 2 space-related orders totaling $4.8 million. We continue to see inbound inquiries and demand from both distributors as well as direct cannabis customers for our supercritical CO2 tank as well as dosers for packaging. We are now developing the CO2 Trifecta, a new product which we'll launch in the second half of 2019, to serve an unmet need from our cannabis customer base. The Trifecta will be able to deliver a continuous flow of CO2 in either liquid or gaseous form at pressures up to 850 psi. This allows customers to add significant capacity with an economical solution. Currently, if more capacity is needed, racks of bottles are manifolded together. The challenge is that these cylinders have to be filled by weight, which makes it difficult to refill, so generally they are swapped out. What the customer wants and the Trifecta will give them are the following features: high-pressure liquid CO2 to feed the extractor pumps; bulk solutions so they don't have to use high-pressure bottles; and a solution that doesn't require pumps and is low maintenance. While specialty markets are currently just under 10% of our total revenue, with continued innovation and further North American legalization of cannabis, we expect this aspect of our D&S West business to grow over 10% in each of the next 3 years. Therefore, with the first quarter in line with our expectations from our prior guide and putting all of the pieces together, the addition of Calcasieu Pass, Golar's Gimi, additional product innovation and self-help margin actions, we are increasing our full year 2019 guidance as shown on Slides 6, 7 and 8. Slide 6 shows our increased revenue guidance of $1.29 billion to $1.34 billion, up from prior guidance of $1.26 billion to $1.31 billion. The increase in driven by the expected 2019 revenue recognition from the Calcasieu Pass and Gimi projects. We received full notice to proceed for Gimi this week, and we expect the notice to proceed on Calcasieu Pass imminently. We have included a conservative estimate of the margin that would be recognized in 2019 associated with these projects, which can be seen on Slide 7. Note that our guidance does not include the $30 million order for another project won this week, as we are working with Bechtel on project timing.

Our increased full year adjusted earnings per diluted share guidance is expected to be in the range of $2.70 to $3.05 per share on approximately 32.5 million weighted average shares outstanding. This excludes any onetime costs and reflects currently expected project timing. In addition, the guidance takes into account integration timing of certain synergies at VRV. The first full quarter of VRV was in line with our expectation of orders, revenue and cost synergy work. The combination of the businesses has yield additional market opportunities such as India and cross-selling synergies in both E&C and D&S East. As anticipated, the VRV first quarter of 2019 was at an operating margin loss as we moved low-margin backlog out to be replaced by higher-margin work with new pricing, and the teams execute on identified cost synergies. The cost synergies include, but are not limited to, production floor layouts, facility and product rationalization and overlapping back-office costs. Specifically, we have already exited one leased facility in France and will be complete with exiting an outsourced contract manufacturing arrangement in Italy in May. There are other rationalization and production location movements, which will take until the second half to complete. We anticipate the synergies to begin to be reflected in the second half of 2019. Slide 8 summarizes our increased guidance.

I'll now turn the call over to Jeff, who will take you through Q1's specific financial results and end with a reiteration of the increase to our full year 2019 guidance.

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Jeffrey R. Lass, Chart Industries, Inc. - VP & CFO [3]

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Thanks, Jill. Turning to Slide 9, let's walk through the first quarter sales, margin and EPS.

First quarter sales of $289.3 million, an 18.5% increase or 9.5% organic increase over the first quarter of 2018, reflected our strong December ending backlog position and our first quarter order activity that Jill spoke about. Sales in all segments grew organically over the first quarter of 2018.

Additionally, while our first quarter is generally our lowest quarter of the year seasonally, first quarter 2019 sales declined sequentially from the fourth quarter of 2018 by only 0.3% or 3.2% organically. The past 3 year's sequential sales decline from the fourth quarter to the first quarter were 9.4%, 6% and 26%.

First quarter 2019 gross margin as a percent of sales was 23.2%. Adjusted for onetime costs recognized in cost of goods sold in the first quarter, gross margin as a percent of sales would have been 26.4%. This compares to actual gross margin as a percent of sales in the fourth quarter of 2018 of 25.5%, or 26.1% excluding onetime costs. We expect the benefits of our restructuring actions as well as our ongoing sourcing and pricing impacts to improve gross margin as a percent of sales throughout the year.

SG&A of $55.3 million included $1.9 million of restructuring-related costs and is in line with our previously guided figures. As is typical each year, stock compensation expense is higher in the first quarter than it will be for the rest of the year. First quarter stock comp expense was $2.4 million. [Subsequent] 2019 quarters will have lower SG&A than we saw in Q1.

Net income for the first quarter of 2019 of $0.9 million resulted in reported earnings per share of $0.03 and included $8.9 million of restructuring and transaction-related costs or $0.23 of EPS, as shown in row 1 on the table on Slide 9. Also included in reported EPS are $3.9 million of VRV-associated integration and inventory step-up costs or $0.09 of EPS, shown on row 2, and $1 million of other onetime costs or $0.04 of EPS. Adjusted EPS of $0.39 is more than double the first quarter of 2018 adjusted EPS of $0.18.

Slide 10 reiterates our increased full year guidance, as Jill previously discussed. As mentioned, this includes the expected revenue impacts associated with the 2019 portions of Calcasieu Pass and Gimi, which are subject to project timing, but does not include the $30 million order we won this week. Our forecasted tax rate guidance range remains at 22% to 23%. Lastly, our capital expenditure outlook remains unchanged at $35 million to $40 million. And I can now confirm that we will be proceeding with the LNG fueling systems line build-out in our Italian production facility, given the first quarter committed long-term agreements with 2 key customers.

I will now turn it over to Sherie to open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from James West with Evercore ISI.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [2]

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So Jill, curious on the larger-scale LNG projects. There's clearly been some rush to FID here for a number of these projects, but there's been some weakness in, of course, the LNG market, as I'm sure you're aware, in terms of pricing. Has this changed any of the dynamics and the conversations that you're having with customers? And I know these are projects that the build-out cycle is 2, 3 years, so short-term pricing trends really don't matter. But just want to make sure that everything is good to go here. And then if it is so, is that rush to FID still the case?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [3]

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Absolutely. So let me take the second piece of the question first. The rush to FID, certainly still the case. We are actually seeing much more activity, even in late Q1, early Q2, than we did in late Q4, early Q1. So certainly, the market dynamic of a certain amount of 1 million tons per annum that's required is driving these operators to move very quickly. And I think you've seen that with the LNG '19 announcements across the board. We are certainly not seeing slowdown from any of the pricing in the market and probably, just anecdotally for you, these projects are, as you said, are multi-year and they've already been multi-year for suppliers like us in terms of working with the operators and the EPCs on pre-feed work and FERC filing, et cetera. So we have also been asked to reprice our portion on certain projects and are coming out right in line with where we expected, given some of the material cost changes, et cetera, but no change from our perspective to the margin opportunities and the revenue side that exists for us. And I would end the answer to your question with the comment around Tellurian's Driftwood project, which -- the move to 16.6 MTPA for Phase 1 is a significant boost to what we expect from our 2019 order pipeline.

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James Carlyle West, Evercore ISI Institutional Equities, Research Division - Senior MD [4]

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Got it. Okay. That's great to hear. And then on the other side of things, on the M&A front, obviously VRV, a big transaction, nice transaction for you guys. But I know, just knowing you Jill, you'll not rest on your laurels, so I suspect you're engaging in other opportunities. Are there more tuck-ins or opportunities out there that could come to fruition in the next, call it, couple of quarters?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [5]

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Absolutely. So we are -- we've always said that we will use our cash and our balance sheet to invest both organically and inorganically, and we've talked about the opportunities from the repair and service side as well as on some of the E&C opportunities that exist. While we're focused on integration, you can't always pick timing on some of these deals, and we would continue to pursue some of the opportunities that are highly strategic to us. And I think just as a general comment in the energy space, you're seeing -- Chevron-Anadarko is a great example, and I think there's many strategic opportunities that could happen very quickly here in the industry as a whole. And certainly, we won't look to wake up one morning and read about a strategic deal that could have been important to us, so we're trying to stay ahead of that from generating opportunities in our pipeline.

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Operator [6]

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Our next question comes from Walter Liptak with Seaport Global.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [7]

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I wanted to ask about the guidance for this year. Obviously, some nice things going on there with $20 million to $30 million from the Venture Global and the Gimi project, but I wondered about the all-in number that's there. Like, as you're figuring out the margins for Venture Global and other projects, what kind of margin should we be assuming on those?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [8]

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Yes. We -- obviously, from a competitive standpoint, we don't share project-specific margins, but you can look at big LNG project margins at kind of between 33% and 40%, depending on the content, the size, et cetera, from a gross margin as a percent of sales perspective. Some of that depends on the timing with which the deliveries happen and so on. Hence, why we repeated 4 or 5 times in our comments that it's subject to project timing. So my statement of conservative estimate on margin takes the projects that we've included, our estimated 2019 portion that we've guided to at about 25% operating income drop-through.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [9]

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Okay. Got it. And then the 2019 EPS number, it sounds like there's some nice 80/20 coming through. But it also sounds like there's some big opportunity with purchasing. Is that in the 2019 guidance?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [10]

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There's a part of both of those numbers in our guide, but there's incrementally more that are not included in the guide, which we are continuing to go after. And I think, everyone -- just to take the elephant in the room off the table here, everyone understands our philosophy on guidance is to put guide out there that we can achieve handily, and we look to do that and continue to take margin from the opportunities that we've talked about.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [11]

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Okay. Great. So just to be clear, that $4 million of procurement savings, the timing of that is part 2019 and part 2020?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [12]

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Yes. So the $4 million that we've included in 2019 is sourcing and pricing together. And if you took what we expect from an annualized perspective from sourcing and pricing that's currently well underway, you can double that number.

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Operator [13]

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Our next question comes from Martin Malloy with Johnson Rice.

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Martin Whittier Malloy, Johnson Rice & Company, L.L.C., Research Division - Director of Research [14]

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Congratulations on the orders. I just wanted to follow up on the -- along the lines of the margin question. Can you maybe give us an update segment-by-segment in terms of where you're looking to get to in terms of gross profit margins and maybe timing?

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Jeffrey R. Lass, Chart Industries, Inc. - VP & CFO [15]

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Sure. Yes, so for the full year, our total gross margin, we continue to guide sort of in the 25% to 30% range for the full company. And that breaks down by segment, E&C is in the mid-20s, 24%, 25%; D&S West is mid-30s; and D&S East all-in is sort of low-20s for the full year.

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Martin Whittier Malloy, Johnson Rice & Company, L.L.C., Research Division - Director of Research [16]

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Okay. Great. And then with respect to the long-term agreements that you signed with the 2 key LNG fueling system customers, if my memory serves me correctly, the -- that market was pretty tight in terms of manufacturing capacity. Could you maybe talk about the importance of these long-term agreements? And what it might allow you to do on the manufacturing side?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [17]

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Absolutely. So as you know, there's a big move, especially in Europe, for these trucking customers to move to LNG-fueled trucks. What we're seeing is a breadth of customers. If you asked us this 6 months ago, we would've said 1 or 2 customers are really moving this direction, and now we're seeing more than a handful that are talking about going there and actually starting to build LNG fueling systems. We anticipate that the size of this opportunity is much bigger than we had originally sized it at, and I think across -- you could safely say across the next 4 to 6 years, you're looking at $500 million easily of build, of which we would have a significant subset of given these long-term agreements. The manufacturing capacity standpoint and one of the reasons that we're building out another line in Italy is given our expected size and volumes across the next 4 to 6 years for these European customers. We're also seeing opportunities for these tanks on other vehicles in India, in particular. So with respect to the MOU we signed with IOCL, there is also LNG opportunity for over-the-road truck for some of the larger trucking suppliers that are in India, and we're starting to see interest there. So the capacity build-out this year will be critical for the next period of time given the long-term agreements that we've executed.

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Operator [18]

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

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Robert Duncan Brown, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [19]

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Sticking with the European opportunity, you also talked about the station build-out. I think you said you got an order for one, even more in Germany, another 15-or-so. What's sort of the selling price or revenue per station you can get? And what's the opportunity on the station side?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [20]

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Yes. So there's multiple different types of stations, and you can have fueling stations that go from the bunkering side, which are EUR 5 million to EUR 35 million of content -- of Chart content per project. We think that that's 1 to 2 projects a year, with the first order opportunity coming in Q4 of this year, which would result in one build in 2020. But these smaller stations, which in particular are for the NG toll avoidance in Germany, range from EUR 1 million to EUR 2.5 million of content for us per station. I think that you'll see probably 3 to 5 a year, would be my estimate, given the 2019 and 2020 suspension.

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Robert Duncan Brown, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [21]

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Okay. Great. And then maybe switching to the large LNG projects. I know you gave some color on 2019. How do you see the split of projects signed kind of going into 2020 and 2021 maybe on a percent of an order or some basis like that?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [22]

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So just -- Rob, just to clarify, are you asking the way the order -- I think the orders will flow or the revenue associated with the orders?

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Robert Duncan Brown, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [23]

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Yes. I was referring to the revenue. If you get an order this year, how does the revenue flow through?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [24]

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Yes. So the majority of the revenue will be in 2020 and 2021 for the orders that come in this year. Just by way of example, I mentioned that we're still sorting through the timing on the $30 million air cooled award that we got yesterday. [We think that] that would be $4 million or $5 million of revenue in 2019, with the brunt of it in 2020. If we were to get a -- Driftwood in the third quarter, you'd have just a couple of million dollars recognized in 2019, and then subsequent to that would be another 2.5 years from there. So you can handily say that is a small percentage in 2019 and then a very big ramp in 2020, 2021. And assuming the timing kind of between now and Q3, then it would ramp down in 2020 -- late 2022.

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Operator [25]

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Our next question comes from Tom Hayes with Northcoast Research.

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Thomas Lloyd Hayes, Northcoast Research Partners, LLC - MD & Senior Research Analyst [26]

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Congratulations on the quarter. Jill, I was just wondering, maybe you could elaborate a little bit more on the agreements you signed with your key industrial gas customers, especially you called out, I guess, governing global activity.

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [27]

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Yes. So obviously, we're unable to comment on the specific customers themselves, but you guys understand who the majors are in the spaces. The one particular customer that we signed the agreement to govern global activity, that's a pretty big move. Historically, the purchasing would happen in the independent regions. While governed by a corporate structure, the negotiations on agreements would happen regionally through the purchasing locations, which can take a lot of time as you're working on each individual agreement. So this expedites the way that we can move forward with each region and how quickly we get new orders on the long-term agreements coming through for us. So that's a big move, it's something that we had never had before, and we're very excited about that. Then the second agreement that I mentioned that we extended 2 years, that's a very large player as well, and that allows us to fulfill their needs, work with them on innovative solutions that they've asked us to work with them on without having to spend 6 or 9 months in a renegotiation and a lot of legal back-and-forth. So it expedites volume, it allows us to add opportunities that we didn't have before and takes a lot of back-and-forth off the table. So anytime we comment on an extension or a new long-term agreement, those are very, very positive when it comes to the industrial gas guys.

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Thomas Lloyd Hayes, Northcoast Research Partners, LLC - MD & Senior Research Analyst [28]

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Great. And then just a quick follow-up on VRV. You mentioned in your release that they had an operating margin loss for the quarter as the low-margin backlog projects worked through. How -- maybe just kind of broadly speaking, how many more quarters do you think we have as kind of working through that low-margin backlog, trying to get into the higher-margin projects?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [29]

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I think you have a full another quarter. So Q2, we expect that to be the case, and then Q3 and Q4, we expect that to be fairly well flushed out at that point. So the second half, you'll see synergies and you will see higher margin flow through out of the backlog.

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Operator [30]

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Our next question comes from Matt Trusz G. Research.

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Matthew A. Trusz, G. Research, LLC - Research Analyst [31]

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Jill, with increasing your order potential, order outlook for big LNG in 2019, is this all calendar pull-forward of the same pipeline you had been working? Or is there some sort of increase in either your addressable projects or the likelihood of some of your projects proceeding?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [32]

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It is the latter 2 comments. So there's further projects that we have information on that we think will move forward that aren't included -- weren't included previously in our listing. There's the expansion from Driftwood Phase 1 that I commented on. And then there's also some knowledge that we have as a business, which we're unable to share, but that we would anticipate might accelerate certain projects that we previously thought would be in 2020, potentially, into late 2019.

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Matthew A. Trusz, G. Research, LLC - Research Analyst [33]

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Great. And then just to follow-up on the food space and cannabis discussion. Can you frame what you see as your total addressable market here compared to the revenue and growth numbers that currently stand?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [34]

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Yes, absolutely. So you have to really take this by each of the pieces of specialty markets in order to address the total, but the magnitude of this is very significant. Cannabis alone, we gave some numbers on the February call about the size of the market there. We don't see a lot of early competitive activity in that market, and as we continue to be first to market with new products, we think that the size of that is in the hundreds of millions of dollars space. On the space exploration side, that's a smaller addressable market, just given that it's fewer players and obviously, the application itself doesn't happen as frequently. So that's kind of in that $50 million to $75 million of addressable market, where getting kind of $12 million to $20 million a year on an annual basis is significant to us. And that's where I would see that particular piece of specialty markets continuing. Food and beverage is a multi-hundreds of millions of dollars market opportunity for us, lots of different applications for our tanks as well as the doser side of the business. And then I did comment today on hydrogen, which is certainly up and coming. It's been around the edges for a long period of time, but between cannabis and hydrogen, those markets, we're getting an exceptional number of inbound inquiries, certainly locking in a lot of our slot production on the hydrogen side and lots of different applications, not just for the passenger vehicles that I talked about today, but across the board, globally, for various different hydrogen applications. So that market is another hundreds of millions of dollars of market. So there's a lot to go after there. And I would say across the specialty market space that, for the most part, we're not taking share from someone else, there's share of the market to go and get on our own.

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Operator [35]

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Our next question comes from Eric Stine with Craig-Hallum.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [36]

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Just wondering if we can just go back to India. Given the agreement with IOCL, I know a lot of the oil majors are making noise along with OEMs around a pretty sizable infrastructure build-out. So just maybe talk about the opportunity that you see there. And then beyond IOCL, just curious what type of interest you're seeing from the other large players, Petronet and GAIL, I guess, specifically.

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [37]

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Yes. So we signed that agreement -- first of all, it is not an exclusive agreement, and we did that purposeful because of your comment there around Petronet and GAIL and the other opportunities. But IOCL, amongst the other major players in India, certainly see a lot of LNG infrastructure build-out opportunities, anywhere from -- you've got re-gas stations to over-the-road trucking, like a commented on. So there is a significant amount of infrastructure build that has to happen. India is different than China, has been in terms of how they intend to build out the infrastructure. So growing the LNG market and being a key participant in that from the equipment standpoint was the key reason that we chose to partner up with IOCL and work to build that market out. Since the announcement of our MOU to work together with them, and this is primarily on the D&S side of our product category that we're seeing the interest, we've had both of the parties that you mentioned along with 2 or 3 others that have come to us and also asked us to work with them around building the market out and having some tank and trailer offerings. Right now, there's -- I mentioned about $11.5 million of bidding activity that we have currently in hand, which we expect that we will able to lock down fairly quickly here. There's multiple other tenders that we're aware of that we don't include in that number just given the fact that we wait until we actually have that RFQ in-house. But I would expect that this opportunity is, again, in the hundreds of millions of dollars for the market, and for us, growing very quickly in the next 2 years. I think you'll also see as these offtakers start signing agreements, with Tellurian's comment on Petronet and some of the other folks that have offtake agreements into India, there will be a forced infrastructure build versus just a casual, "Hey, we're going to need it at some point," because you've got to get the gas in somehow.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [38]

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Yes. Got it. Very helpful. Maybe last one from me just on the pipeline, the $600 million to $800 million. I assume that, that does not include -- at least in the past I don't think you've included the air-cooled heat exchanger potential content. So maybe if you could just talk about what that could look like, how that matches up with the list that you've provided in every deck.

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [39]

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Yes. I mean the order I just commented on today, the $30 million air cooled order we were awarded yesterday from Bechtel, that's a great example of content we would not have had without the Hudson Products business being part of the Chart family. Those are -- that's a project that's been well underway that we didn't have content on previously, and we're able to get content given that product offering that we have. Generally speaking, what we're seeing is on the total equipment content for us, air cools are adding somewhere between kind of 7% to 9% of additional content. So if you said a $500 million order ex air cooled, you could say between $35 million and $45 million more for air cooled. Well, I don't want to mislead anyone to say it's a lock that the air cools are Chart content. But certainly, we have a good shot at some of these projects for air cools that we wouldn't have had 2 years ago.

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Operator [40]

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Our next question comes from Pavel Molchanov with Raymond James.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [41]

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This kind of goes back to I think what we talked about just a few minutes ago, which is this week, the order that you won from the unnamed LNG project is only heat exchangers. By contrast, Calcasieu Pass is a more integrated solution with cold boxes. What determines, for any given project, whether the customer will want an integrated solution from Chart versus purely components?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [42]

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It really comes down to what point in the project the customer is and how far along. So some of these projects have been baked, for example, long before we ever had IPSMR as a process technology offering, or even in the case of air cools, long before we had an air-cooled heat exchanger for the LNG market, which really came through Hudson. So where you see air-cooled content by itself, it generally is the result of a project being further along as well as a different type of heat exchanger in the actual content, heat exchanger/cold box combination, meaning from a different supplier. What we are seeing this time around on the mid-scale projects, and certainly you can see that on the slide that we presented today with the 10 projects, we're seeing much, much more on the integrated solutions side, where the customer -- the operator actually is asking for the brazed, the cold box and the air cooled. And then the differentiation point is really whether they're just wanting the integrated equipment solution or they want the equipment plus the process technology. So that's become much more of the dividing line, is whether it's the technology plus the equipment or just the equipment suite together.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [43]

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Okay. And obviously, kind of setting aside the higher revenue number from the integrated sales that you may have, is there a difference in the percentage gross margin structure in terms of pure heat exchanger sales versus the cold box?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [44]

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Yes, there is. So there's 3 ways to think about the gross margin on these projects. If you get the process technology and the equipment suite together, that's the highest gross margin combination, and that's when -- I commented earlier, kind of think of it as 33% to 40% for these projects, that's at the higher end of that. If you're a brazed plus a cold box combination plus air cooled, then you're in that mid-30s range, kind of low to mid-30s. And if you're strictly air cooled, you're in the mid-20s.

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Operator [45]

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And we do have a follow-up from Walter Liptak with Seaport Global.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [46]

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Just a quick follow-up. You mentioned the converts dilution, and I wonder if you could just help us with that. What could the potential impact be for 2019?

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Jeffrey R. Lass, Chart Industries, Inc. - VP & CFO [47]

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Yes. So I would just comment first by saying we're very early in the life of those converts, right? So while they're currently in the money, and we have got to consider the possibility that they would be converted both from how we treat the debt perspective, and you'll see that when the Q comes out and you look at the balance sheet, but also from a dilution perspective. The likelihood of conversion, certainly this year, is relatively low. But that being said, we saw $0.01 of dilution in the first quarter. As we look at the full year, it looks like 10% to 12% -- 12 -- $0.10 to $0.12, sorry.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [48]

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$0.10 to $0.12. Okay. All right. Great.

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Operator [49]

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And we do have a follow-up from Martin Malloy from Johnson Rice.

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Martin Whittier Malloy, Johnson Rice & Company, L.L.C., Research Division - Director of Research [50]

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I was wondering if you might be able to comment about conversations, kind of the tone of conversations that you're having with customers on the fractionation and gas processing side for the Brazed Aluminum Heat Exchangers?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [51]

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Sure. So we continue to see a healthy market on that side, and I would kind of split it between nat gas and then the petrochem side of things. Petrochem, as I've commented, and now it's been I guess 2 quarters I made the statement that it's been a healthy market. It's a hard-to-predict market, it has ups and downs, and we've -- we're kind of at the ups right now. And we continue to see that, in particular, in the Middle East. So that's been very healthy and continues to be, and I'll have more color on that as the quarter continues. But certainly, out of the gate, the first 2 weeks of April, we've had very strong order activity on that side of the house. On the nat gas processing side, this has been going on -- I think a year ago, I commented that I expected that to slow down a little bit in the second half of 2018, and that didn't happen. Order activity has been healthy and continues to be. And I did comment that we booked another nat gas processing plant equipment order, but I would say that I think that you have to be cautious about the nat gas side of the market for us. We have a very conservative growth number in our 2019 outlook, talking 1% to 2%. But I think that at some point here, like a typical nat gas cycle, it'll become overbuilt and slow down. We haven't heard that yet from the customers, but I think everybody is sharing the sentiment with each other that, that could happen here and taper off a little bit as the year goes on. And that's how we've designed our forecast and our guide.

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Martin Whittier Malloy, Johnson Rice & Company, L.L.C., Research Division - Director of Research [52]

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Okay. And NGL fractionation, is that included in your comments about gas processing?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [53]

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Yes, it is.

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Operator [54]

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And we do have a question from John Sturges with Oppenheimer.

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John Sturges, [55]

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Yes, exceptional quarter. I was just curious with the order growth you're seeing, and I know you have a lean process ongoing to expand capacity with the same footprint. Will there be a need for additional capacity build-out and financing?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [56]

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There will not be a need for additional capacity build-out. If there were a financing need, it would be for one of the inorganic strategic opportunities if they were to arise. But given the lean actions that we are well underway into, we have plenty of capacity to take on the orders that we've described, both from the base business as well as from the big LNG side of things.

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John Sturges, [57]

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So SG&A then would be expected to, as I see in the forecast, to roughly remain fairly static?

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [58]

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Correct, correct. The incremental SG&A is essentially 0 for the order activity in the pipeline that we have. And our goal is actually to reduce SG&A further than what we've guided to.

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Operator [59]

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Ladies and gentlemen, thank you for participating in today's question-and-answer session. I would now like to turn the call back over to management for any closing remarks.

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Jillian C. Evanko, Chart Industries, Inc. - CEO, President & Director [60]

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Thanks, Sherie. We're excited and fully ramped to begin production on the Venture Global and Golar orders. And we're confident on the execution across our business on both the top line and margin opportunities discussed today. Lastly, I would like to invite our analysts and shareholders to our Investor Day on November 14 at our Brazed Aluminum Heat Exchanger facility in La Crosse, Wisconsin. We picked November to make sure you guys really wanted to come. Save the date. Invitations will be distributed this afternoon. And thank you all for joining us today. Goodbye.

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Operator [61]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect, and have a wonderful day.