Q3 2019 Earnings Call
Ladies and gentlemen at least embargo conference call would be good momentarily once again, ladies and gentlemen, we feel more.
Third quarter conference call all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question answer session.
The company supplemental presentation was issued earlier. This morning. If you have not received a release you may access a barbizon first website at Www <unk> industries Dot com.
The phone replay of today's broadcast will be available for the conclusion of older coal until Thursday October 24th 2019.
The replay information is contained in the company's press release before we begin the company like me to remark that statements made during the call but are not historical in fact, our forward looking statements. Please refer to the information regarding forward looking statements in Respecters included in the company's earnings release and latest filings with the FCC.
The company undertakes no obligation to update probably were vars any forward looking statements I would now like turn the conference call Overdeliver coach our industry CEO .
Thanks, Kevin Good morning, everyone and thank you for joining us today to go through our third quarter 2019 result in 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 the RV and air exchangers, including an update on our original air exchangers cost synergy assumptions of $20 million to realize number of $29 million still within your original timeframe. The first 12 months of ownership.
What's your supplemental presentation that was released this morning, starting on slide two this represents how we think about her business opportunities many of which are driven by what our customers are telling us underscored with profitable growth, we're focused on or industrial gas and energy end markets supported by the element in eighth through eat around the circle.
Let her Asia's growth machine for a business over the next seven to 10 years global LNG infrastructure build out.
The focus of the activity a small scale LNG as long as transportation and associated fueling stations, which you'll hear about today letter beazer innovative solutions, including our process technology as well as her upfront engineering and design in the third quarter, we signed an M or you would EG N P to develop LNG infrastructure globally with a focus on India.
With our previously signed and will you with iOS he'll we now are working directly with two of the leaders in the Indian City Das Network development.
Letters. He represents the only reason some of you listen to this call with updated timeline from certain customers and leaps toward F. idea in the third quarter, we're bullish on our order pipeline through 2020 for Big LNG.
We're excited that with worrying to recently revised project timing for driftwood compared to our underway campus. You pass work, we have an extended upcycle Jani originally assumed three years of course will address the billion dollar question of how much f. ideas left but I'm going to make you listen to the core parts of the business first.
What is commonly missed about her business is the underlying growth machine, our distribution and storage industrial gas customers that are on long term agreements. This is part of letter de driving the business, while the broader macro sentiment toward industrials is uncertainty in particular in light of the ongoing trade situation, we're confident in or underlying industrial forecast for.
2020 in part because of these LTAC.
In the third quarter, we completed negotiations with two of our top three customers to extend our agreements. The total annual revenue associated with these two customers is on average $85 million.
Additionally, we're in discussions about signing up another customer to long term agreements, which would be the first with this customer who has recently significantly grown in the industrial gas space to the consolidations in the industry.
Well hold a fantastic progress on specialty markets until later in the deck.
Finally to close a circle letter eat you heard or drumbeat of 80 20 of cost synergies through integration of driving sourcing savings of over $6 million a continued focus on productivity.
Oh this will continue as part of our culture and year to date 2019, we have achieved over $13 million of annualized cost savings. In addition to integration synergies all of which will be fully seen in 2020.
We will share with you today the additional cost savings, we see ahead of us in Q4 2019.
Macro theme support our continued strong order book in particular, driven by the LNG infrastructure build globally and specialty markets as shown on slide three as I mentioned on last quarters earnings call. I am pleased when we received multiple 1 million dollar plus orders within a quarter, which demonstrates the broad based growth in multiple levers we have to pull to support our organic growth.
In the third quarter, we received 33 orders greater than $1 million with each and see cryo easy fans and DNS West and nine Indiana East.
The third quarter orders of $286.2 million included a $6.6 million Air Cooler award on the last day of the core expanding our equipment content to air coolers on venture Global Calcs you pass project.
Also within the quarter, we received an order for $5 million with one customer for hydrogen applications, a 2.7 million dollar order for pipe related to a space application and 9.2 million dollar order for hydrogen recovery system in ammonia plant and a seven and a half million dollar for I envy. The part of the RV that produces shelling to heat exchangers and this is.
Just to name a few the third quarter orders were up 8.5% over the same period in 2018, which included an N C quick ship order of $5.7 million as well the $12 million space launch application order in DNS West.
Fourth quarter started off on the right foot with verbal receipt yesterday of a $9 million award for a power plant project in the Caribbean.
Additionally, we were awarded a 23 million dollar project for a PDH separation system for with 1.3 million was booked in the third quarter and the remaining <unk> is expected to be booked in the fourth quarter. Once full notice to proceed is given.
September was the highest order month of the quarter for N C. Cryo any NCCN fans, which trends well for 2020 outlook. Additionally September was the highest most of the quarter for industrial gas orders with our major customers a leading indicator for how we think about 2020 growth.
As we've said in the past packaged gas and BNS is leading indicator for the rest of that business in the third quarter packaged gas orders were $65.6 million increase over Q2 of 12.4% and an increase over Q3 2018, a 7.8%.
We anticipate 3% baseline industrial gas growth in 2020 as indicated by our majors before any of the higher specialty market growth.
Third quarter 2019 specialty market orders, a $46 million were 56% higher than the same quarter of 2018, and 54% higher than the second quarter 2019 with record order levels in lasers and hydrogen.
Specialty markets sales of $40 million in the quarter were 6% higher than the prior year contributing to our total Q3 2019 revenue of $358 million. This order activity contributes to our total record backlog of $755.6 million.
Flipping to slide four we continue to see significant growth in the global LNG infrastructure build out where we play across the value chain.
Throughout today, you will hear about how the global nature of LNG will positively impact our business over the next decade. Currently we are pursuing LNG related projects in 71 countries around the world before we go into how these countries are intending to utilize LNG and how that impacts chart, let's discuss the strength in order opportunities and small scale LNG terminals fueling.
To transportation, both marine and over the road, including trailers.
The third quarter of 2019 was a record quarter for LNG fueling station orders with 19 stations booked compared to only three in the third quarter of 2018.
The strong third quarter of 2019 contributed to our year to date total orders for 41 fueling stations compared to 21 year to date and 2018.
Much of the increase in activity. This year has been driven by the European Union, presenting new emission reduction standards for heavy duty vehicles earlier this year.
The new regulation requires carbon dioxide emissions from H.T.V.'s to be reduced by 30% say 2030.
Within the quarter there were multiple notable fueling stations that opened with charter equipment in process.
The Nordic Energy company gas opened its forestation in Sweden gets them is planning to create a network of 50, new filling stations for heavy duty vehicles in the nordics by the early 2020.
End of September and New station was open in Poland by Vsec asphalt and industrial company that provides construction products and services Vsec asphalt chairman shared that he expects to expand the company's fleet of LNG trucks to 50 within the next 12 months.
The company also shared at the opening ceremony. The chart has won the tender to supply. The next LNG terminal due to our technology and ability to supply complete solution, including installation in servicing.
While many of the stations being built by chart or LNG. Our stations can also be equipped with the CNG module to cover fueling requirements for the complete spectrum of natural gas powered vehicles.
The 19th stations booked in the third quarter two were L. CNG stations in India.
Fueling station infrastructure also contributes to growth in or LNG over the road trucking business earlier. This year, we signed two long term agreements with heavy duty truck manufacturers the sole source our LNG fueling tanks for this application and we're partnering with our customers on new solutions.
Additionally, we are seven months into our development over each LNG vehicle Pink line in Italy, and expect production to begin there by the end of the first quarter of 2020, which will even better serve our European customers from a lead time and cost standpoint.
Third quarter LNG vehicle tank orders were 87% higher than the second quarter of 2019 in the highest quarter of Dear.
Also picking up pace in the third quarter was our activity around LNG marine applications in part driven by the proximity of the January 1st 2020 IMO regulations.
In the quarter, we were awarded a contract by L. GM engineering to supply for LNG fuel tanks for their marine fuel gas systems that will power chemical tankers with clean burning natural gas.
As part of Glory holder, LG and contract with Wu, who shipyard to supply LNG fuel gas systems for two LNG powered tankers being built for Reed Uribe down so tank.
Falls in order earlier this year for marine tanks that will be used in the first to revert to see LNG fuel chips in China.
Continuing in the innovative vein that is charged engineering core competency we have designed in conjunction with our customer Babcock LG anaphora apparatus that prevents oil run down into the bottom or cold section of the heat exchanger at local conditions.
This will be utilizing Babcock LG eco smart technology for onboard LNG real liquefaction systems on LNG ships.
We're pleased to be filing a joint patent application with Babcock on this.
Babcock supplies are eco smart LNG real liquefaction package to abuse onboard new build LNG carriers to preserve the cargo and transportation.
Cargo boil off is around 0.1 per cent per day with an average wage of 14 days as part of what we offer with Babcock we assist in ensuring the best economics for each vessel with our skid mounted brazed aluminum heat exchanger being critical to the performance of the package.
Transportation applications continue to drive demand for a trailers as you May remember 2018 was a record trailer order year for chart and as an example of the continued demand through the third quarter 2019, our year to date trailer orders are ahead of the year to date 2018 orders.
Before we moved to other global LNG activity I'd like to just give an anecdote, but the magnitude of global infrastructure build out that is underway.
We recently quoted on two tenders for a country and Europe's armed forces for over 50 million euros strictly for tank containers with pumps in generators for fuel service well. This would be a 2020 award. It gives you the sense of the opportunity worldwide for us.
And you just heard the regulatory emission standards reduction is driving certain clean energy infrastructure development.
We're also seeing increased government and regulatory body interest in a de carbonate nation trend across the globe.
Slide five of the visual that demonstrates a subset of countries and governments around the world that have taken a position on a cleaner feature.
On the far right hand side of the slide our high LNG growth countries, Japan, Papa New Guinea, Philippines and Vietnam.
Recently, we received to reach out from the government Papa New Guinea, indicating that they are interested in potentially working with us as they develop their national energy Master plan, which should include monetization of stranded gas fields for power generation, they're considering small scale LNG as well as transportable modularized LNG containers for shipment.
Vietnam is one of the most public proponents of LNG with the country's total LNG demand estimated to reach 10 million tons per year by 2030. The Vietnamese government is looking at a 5 billion dollar LNG project in the southern been to one province, which would include an import terminal and gas fired power plant.
The intended that this facility would import from the United States, We're working with members of the consortium of companies, including energy capital Vietnam to participate in the development.
We're currently bidding on a variety of downstream applications in the region with our trailers ISO tanks and re gas station offerings.
Now onto Japan, Japan is imported LNG for over 50 years, and just recently announced that $10 billion will be invested by public and private sectors to encourage broader use of LNG around the world.
As funding would support processing plants, receiving terminals in power generation and.
In September I visited multiple LNG customers and potential customers in Tokyo, and Osaka not only at the intent there. The action is well underway with companies such as GDC Chiyoda Twill married Beanie Osaka gas in general.
Speaking of mirror Bini socket guessing Jira. These are three the 17 shortlisted companies for spot LNG for which Bangladesh could purchase 1 million tons of LNG next year.
Metro Bangle is in charge of LNG imports, Bangladesh and Shortlisted 70 companies from the original set of 43 currently the country has two floating storage and re gas units and they are building land base terminal that can handle seven in half Mtpa of LNG. There's also noteworthy that we currently work with over half of the short listed companies, including some of those mentioned.
As well as Shinier Petronas and Chevron.
And of course, India continues to go LNG gang Busters, both from a macro perspective as well as our specific order activity in the region. Just this morning, we received another synergy order in India for $1 million for vaporization package.
And do you expect an increase of $17 billion of spend in the next eight years on the city gas distribution networks and includes an increase in a number of L. CNG fueling stations to over 9000 from 1800 today.
And we'll use with iOS, Yale and AG MP have proven to be effective already in the third quarter iOS he'll awarded us the cold box for their Panda pet refinery expansion. Additionally, EG and he has awarded a six CNG stations in India, Vishal, we'll share more specifics around or India potential when he discusses our viavi an air exchangers integration update shortly.
All this activity underscores the continue need for both LNG supply as well as the local infrastructure to support those geography looking to either imports or be self sufficient on natural gas. So lets segue into what activity. We're seeing in both small scale and big LNG I flipping to slide six.
Over 40 countries currently kind on oil or diesel for more than 25% of their electricity needs and nearly all of them rely on oil imports for power generation.
Small scale growth expected to be between 12 and 15% in the next 15 years, we expect to continue to exponentially increase small scale terminal order rates in the coming months.
On the table on slide six there are now 12 potential project shown as compared to the prior 10, but I've said many times before this is not the full set of our order potential but select projects that we're sharing to give you a sense of the possibilities in the market being bid on today.
Ultra content for these projects shown here is over $150 million bolded three projects to give you some more specifics.
On October 4th the Department of Energy announced the issuance of an order approving LNG exports from Eagle Jacksonville project number six on the slide Eagle Jack's project plans to export small scale quantities of LNG as well served the domestic market and provide LNG as a shifting fuel you will also receive the final environmental impact statement from FERC in late September to construct a fun.
Silly.
Number nine on the slide is the Caribbean power plant project for which we see the verbal order yesterday, we will supply tanks, three gas system and vacuum jacketed pipe out of both our U.S. and European locations.
Finally, Mexico is a market where small scale LNG is very appealing natural gas is cheap and plentiful in Mexico coming from Texas Western regions in offshore, but the pipeline infrastructure for distribution to the end users is limited to.
The delivery cost of LNG is as much as 10 per and then b to you less than that easily equivalent there's an existing base and customers and demand is growing with small industrial complexes power generation over the road transportation and mining.
Much like what we've seen in the Caribbean. We believe the region is right for virtual pipeline applications, but instead of importing LNG our customer base is proposing projects will provide the surplus natural gas real 12 is not just one customer working with us in the region, but rather multiple opportunities in various stages of progress.
Now moving to Big LNG I'll go through each through the project updates on our pipeline first and then discuss the elephant in the room, which has people asking how much F.I.D. remains in the cycle starting with the five projects for which we anticipate revenue in 2020 as shown on slide seven.
Moving past real one we were on track to complete the goal or give me S. LNG project on schedule in Q1 2020.
So two is venture global Calcs, you pass project, which we booked in March of 2019 and receive final notice to proceed in September the timing of the project had a small shifting revenue from fourth quarter of 2019 into 2020.
Based on the current project schedule, we anticipate just over $100 million of revenue in 2020 with the remaining in the first half of 2021. It should also be noted that on September Thirtyth. Our NCCN fans group was awarded a $6.6 million order from Kiewit for air Coolers on this project.
Moving to tour in Driftwood projects shown in rose three floor in and Petro net LNG entered into an expanded and will you increasing their investment and the driftwood project to five mtpa or a two and a half a billion dollar equity investment. This brings further momentum toward s. ideas days, one or 16.6 million tons per annum, which is now expected in the first half of 2020.
With only 4 million tons per annum remaining to get to F.I.D.
While the change in schedule impacts are 2020, big LNG revenue upside potential it extends our number of upcycle years. So our big LNG Upcycle begins in 2020 with the delivery of equipment for the Calcs you passed project and given the updated driftwood timing extend or number of years inclusive of big LNG in the cycle through 2023.
Real for seniors Corpus Christi stage, three project, which we estimate to move to S. IDN 2020, we've shown a very conservative revenue potential for 2020 on this slide.
As always Shinier thoughtfully moves as projects ahead with very diligent scheduling as evidenced by their on time delivery of prior projects. Additionally in September Shinier completed gas supply agreements with UGI resources UGI has agreed to sell natural gas dish and year over a period of approximately 15 years beginning in early 2020 Shinier has indicated that this transaction is expected to supply.
Corpus Christi stage three.
Real five on the slide in venture gold Platinum in project on September Thirtyth Vg received FERC approval for the building of blackmun's as well the affiliated Gator Express natural gas pipeline system.
Just yesterday the deal we issued the order approving exports of LNG from Blackmun's.
As a reminder, PGN AG has already committed to two and a half million tons per annum from blackman.
On slide eight which is our traditional big LNG project opportunity list, we've already discussed the first five shown.
Instead of adding commentary to each I will just moved a number six which links directly to the Vietnam discussion in the third quarter LNG Ltd announced its first Magnolia related offtake and will you with Delta offshore energy and in conjunction with a Buck Lou provincial government in Vietnam. The intent of the term sheet is to work to executing a binding S.P.A. for 25%.
End of Magnolias original 8 million tons per annum, which could become 8.8 mtpa if FERC approved their request to increase the capacity of the terminal.
Exxon is moving ahead with the Mozambique project and we are pursuing the opportunity for gas treatment ball cryo storage and air cooled heat exchangers.
I guess Amar continues to gather steam with two new international oil companies validating the process in the third quarter. After years of work with our team. This brings us to three overseas that a validated process for use in their project and also brings credibility to off takers on projects utilizing our technology.
Additionally, we are starting to see a larger future opportunity for making existing facilities more efficient as LNG pricing becomes more and more competitive existing terminals, we need to find ways to lower cost with our processing equipment. There are many ways to retrofit at fairly low cost that we believe will contribute to more creative approaches from current operators.
So how much if I'd remain.
Slide nine shows continued LNG growth, but the market ranges predicting between 4% and 7% CAGR through 2030 at this pace, we will outpace the record supply capacity brought online in 2018 and 2019 by the year 2022.
The two to three year project timelines additional supply must f. idea in the next 12 months.
The left hand side of the slide shows 19 projects that had supply brought online in 2018 in 2019, we had equipment on 13 of these 19 projects, which were orders in the years 2012 through 2015.
The best way to think about this is there is a misperception out there there's a finite amount of this idea that will happen well there certainly is competition in the market right now and speed through Q3 of 2020 to F.I.D. is going to make or break some projects remember that we were talking about quarters in a long ball, meaning a 20 to 30 year game. For example, just a couple of weeks.
To go for granted Kindred Morgan a permit to put the first train at the two and half Mtpa Elba Island facility and commercial use and one week thereafter, the first of 10 propose liquefaction trains when its commercial service 20 of our cold boxes will be used in that facility. Originally booked through show the initial authorization to import for the Elba Island facility was issued in nine.
Teen 72.
The project received approval to renovate and re commissioning in 2000 deal you export authorization in 2012 and FERC approval in 2016. So you can get a sense of the length of time in of the naysayers on this type of project I would encourage you to have a longer view toward how these projects may come online and from a chart perspective, we're more than happy with the longer Big LNG upcycle.
I've already given your sense of the industrial gas long term agreement progress. We've made so lets move onto the above 10% growth spaces, our specialty markets on slide 10.
Let me start by reiterating our third quarter specialty market order strength of $46 million, a 56% increase over Q3 of 2018. Many of you have asked us to size the market potential for our products and these spaces John included and while we have done so in pieces in the past we're sharing the multi billion dollar potential that these applications represent on slide 10.
Obviously many of these are new and so we're starting from relatively small base, but the speed of the end users adoption for higher performing more efficient and more economic solutions will continue to increase the utilization of our products in these applications.
Since we had record order levels for hydrogen lasers in Q3, let me take a moment to describe some of the elements of size of market and how we play in each.
Hydrogen is one of those markets that for decades people have said does that really makes sense wildly meaning in the first nine months of 2019, we've seen an abundance of hydrogen related projects move forward related to industrial processes power generation and transportation.
But the cost of renewable declining and governments policies to decarbonize, the hydrogen councils predicting two and a half trillion dollars and sales and an increase in hydrogen demand by 10, X. I 2050, as we talked about on our first quarter earnings call at CV passenger cars and associated stations are kicking off in particular in California, and we predict this to continue.
Our large industrial gas customers have built multiple fueling stations already are lucky is build over 100 and air products as involvement in over 150 hydrogen fueling projects.
Regarding lasers, we continue to be in innovation leader. An example of this is our prototype worked 7200 trailer, which includes new pump technology capable of filling tanks installed and laser applications without having to vent them.
The traditional venting process can take up to 30 minutes, and therefore delays delivery time and waste product the customers. These benefits, including faster deliveries automated features to help standard I think still processes and dual purpose delivery capability again, just another example of our engineering excellence in a fast growing market.
Our specialty markets continue to expand since we introduced the group of applications to you in the first quarter. We've added water treatment systems, which are CEO to an auction opportunities primarily for odor and disinfection.
In recent months, we've seen municipalities across the United States exploring oxygen ozone systems for these applications. We've already received an order for water treatment system from the city of Denver and have several others in Q with other municipalities.
Now that you have a sense of our conviction in our markets and held 2020 is setting up from a demand perspective, John take you through our margin expansion within our organic business and the significant progress already made in our acquisition integration.
Thanks Jill.
As you've heard for the past 12 months, we're hyper focused on continuing to execute on margin expansion activities, both within our Viavi in air exchanger 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 that our 2020 results. The red text on the slide our 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 bottomline impacts. Additionally, our high margin aftermarket service and repair businesses over 15% of the total revenue in the third quarter up from 20 eighteens 13.5% of revenue.
Now flipping to slide 12, both of our major acquisitions from the past 12 months Viavi, which closed in November 15th 2018, and air exchanges, which closed July one 2019 are performing above our original expectations in different ways.
Starting with our most recent addition exceed we've completed projects to deliver over 60% of our original $20 million a 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.
So while I, primarily focused our air exchanger integration discussion around cost synergies there are meaningful revenue opportunities as well and I'll elaborate on two of these that we expect to be realized beginning in early 2020.
First with our broad portfolio of air cooled heat exchangers completed with yet. The addition of ACSI, we have a product option for nearly every scenario in the field.
Till now we focus primarily on the North American market as had a exceed.
Leveraging our viavi manufacturing facilities in Europe in India, we are expanding production to be closer to international opportunities that we previously did not bid as an example, we expect to produce our first air cooler in India early in the first quarter of 2020.
The year coolers, the only part of a compression package that end users to not have a direct access have direct access to an online configuration and quoting system.
We are developing one and are currently pilot piloting the program with one customer and expect to roll it out broadly within the next three months.
This program will improve our customers experienced by delivering products faster with less steps in our customers idea to delivery cycle.
Of course anyone with M&A experience has learned to typically discount revenue synergies because they rarely achieve expectations. Viavi has also proven to be an exception to this.
We have 12, new customers from this combination that have brought over $8 million of revenue synergies, a number which keeps going up.
As part of the revenue synergies Viavi has brought access to the previously imprint impenetrable Indian market and other regions of Southeast Asia.
The third quarter 2019 had record India orders.
As we said since we shared our acquisition of VR via about a year ago, which gave us a foothold in the region, India will be a geography that see significant activity in the LNG infrastructure build out.
This is further evidenced by this week's announcements from energy majors total and Exxon Mobil, taking a direct interest in the Indian gas distribution and infrastructure and working with iOS CL respectively.
Beyond the traditional cost and revenue synergies are the fact that these acquisitions further support an element of our strategy, which is utilize our broad geographic manufacturing footprint to be more agile with our capacity and capabilities around the globe.
Through the AMC transaction, we acquired high quality engineering capabilities in Hyderabad, India.
As part of our global Resourcing effort, all four of our segments will be building engineering capabilities in India focused in Hyderabad.
All of these integration related example, support we call chart smart offering customers global Optionality in excess reducing lead times and in turn support further margin expansion.
[noise], both the margin expansion and the integration efforts are positively impacting our gross margin and Sta gross margin as a percentage of sales of 28.3% for the third quarter of 2019 increased 150 basis points over the second quarter 2019.
This reflects our year to date cost out activities and on an adjusted basis, 28.8% is the highest of the year.
Yesterday and it continues to trend positively with the addition of the air Exchangers with the addition of air exchangers to the chart product portfolio similar to charge legacy businesses ICSI business runs with low SGN as a percentage of sales.
Third quarter 2019, SDMA of 57.9 million includes restructuring and transaction related costs as well as commercial settlement costs. However, on a normalized basis third quarter 2019, SGN a was 48.4 million for 13.5% of sales, which is the lowest a chart since the fourth quarter of 2012.
The two bolded comments on slide 12 are important takeaways as they positively impact our 2020 outlook as we shifted that part of the discussion I'll now hand, it back to Jill to close our formal comments with a review of third quarter EPS and updated 2019 and 2020 outlooks. Thanks, John Slide 13 shows or third quarter adjusted EPS.
77 cents, an increase of 13% over the second quarter of 2019 Rogue one is comprised of $7.4 million of restructuring and transaction related costs or 17 cents Vps and these are the cost of 30 associated with the margin expansion activities. Previously described as well as remaining transaction cost from the air exchangers deal grow to relates to 1.4 million dollar.
As of integration costs or three cents vps, and Roastery is $2.3 million of other onetime costs or five cents vps. These costs related to 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 NEPC.
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 Changers acquisition includes additional interest in share count from our completed strategic financing activities. Our guidance assumed LNG project revenue in 2019, I'm Calcs to pass and give me projects with 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 not book and ship within 2019, but will positively impact 2020, we expect full year adjusted earnings per diluted share to be in the range of $2.70 to $2.90 per share.
Only 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 with line of sight to three potential orders over $20 million each as well as the Caribbean power plant order already discussed. Additionally, we continue to expect more LNG fueling station orders and strengthen trailers in the ended the year setting up a strong 2020 moving to slide 15, let's run through the market and business outlook for 2020.
Yeah.
While there is a view that industrial markets are softening, we have the benefit of playing in a variety of end markets beyond strictly industrial that impact our outlook as you can see on the page. Additionally, we have specific already booked orders as you can see in the fourth column as well as organic activities that drive above market revenue growth.
Our DNS businesses have industrial exposure and while we are taking a cautious stance on industrial production activity into the first half of 2020, we benefit from long term agreements with the industrial gas majors indications from the majors is above 3% average growth in 2020 in some cases up to 5%. So we're taking the low end of that range.
East and west each are forecasted to have above market growth given the drivers that we have already discussed today on infrastructure build out and specialty markets.
Our NC businesses based markets of natural gas processing upstream and midstream are expected to decline in 2020, partially offset by single digit growth in downstream and fans.
And easy Cryo refining petrochem and small scale LNG are expected to grow above 10%.
The specific projects totaling $133 million shown in the fourth column are comprised of already booked orders that have specific delivery scheduled associated with them is the Caribbean project discussed earlier. The is Calcs you pass and see is between portion of the air clear order. We received this past second quarter.
These assumptions roll into our 2020 outlook as shown on slide 16 splitting the outlook into two parts is important as the base does not require any additional big LNG orders.
In the base case, our total revenue growth is expected to be 21% to 24% with 13% to 15% organic growth, including Calcs you pass. This results in expected based revenue between 1.615 and $1.68 billion. We expect full year adjusted earnings per diluted share to be in the range of $4.75 to $5.
And 25 cents per share on approximately 35.8 million weighted average shares outstanding 2020 timing is consistent with prior year seasonality, where the first quarter of the year tends to be the Louis. Additionally, Calcutta passes weighted to the back half of the year.
The upside outlook assumes booking additional big LNG orders based on current assumed timelines for EPS I'd as we discussed earlier in the call. In this scenario revenue would be expected to be in the range of $1.72 billion to $1.79 billion and associated adjusted earnings per diluted share to be in the range of $5.45 to $6 in 15 cents also on a proxy.
Only 35.8 million weighted average shares outstanding in both scenarios are 2020 tax rate is assumed to 21%.
One of the comments, we constantly get is well that's a significant increase there must be a lot of risk to this.
I reiterate that Weve purposely split the outlook for 2020 to base, which does not require any additional big LNG orders or revenue and year to achieve and the upside case. So I'd like to conclude my prepared remarks with a summary of our organic growth in adjusted EPS trends the past few years on slide 17.
In 2017 organic growth was 5% 2018, 13.4%, we're anticipating mid single digits in 2019.
In 2017, adjusted EPS was 96 cents in 2018 $2 in two cents in anticipating $2 and $72 a 90 cents in 2019.
I'll now turn it back to Kevin to open it up for questions.
Ladies and gentlemen, if you have a question or comment at this time. Please press Star then one key on your Touchtone phone. If your question has been introduced.
Yes.
Our first question comes from Martin Malloy with Johnson Rice.
Good morning.
Im sorry.
I'd like to new motto.
Thank you.
I wanted to ask about to 2020 guidance and your description of.
The end markets for re gas storage distribution around the world sounded.
Pretty optimistic to me I'm, just trying to gauge the degree of conservatism that might be.
And your guidance for the DNS.
West group reach.
In the 20.
Yes, we've taken a kind of down the fairway approach on the base case for 2020 here. So I think there's areas that we have some conservatism in other areas that there's a little risk and so I would say that there's more upside to the DNS businesses. Then there is downside and there's probably a little more downside to the.
Then there is upside.
Okay.
With regards the IPO smart technology.
Three Io season, I think that have validated it could you maybe talk a little bit about the timing and prospects for when we might see.
So your potential opportunity there for you.
So we're obligated under confidentiality agreements not to share who those io sees our or where they are in terms of projects and potential utilization of IPO somar. Some a little on 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 not and we would think that in the next years, we'll be able to officially announced something to you guys, which one in what the project is for.
Okay. Thank you.
Our next question comes from Connor with <unk> Morgan Stanley .
Thats what it does.
Okay got it.
I just wanted to.
Diving a little more on comment you made.
What would be the drivers what makes vickers more upside on the DNS side.
What should be maybe for looking at slide 15 here, which of these markets do you think would be well be drug.
Yes, So I think if you will get slide 15 on the DNS side. There is some more potential on the industrial gas side, and thats really around their refurbishing existing tanks versus new but new build their new purchases onto that 3% could be four or 5% certainly LNG infrastructure, both in the east and west.
As an area that we're seeing more and more joint packages of our DNS product with our GNC product. So we're excited about what the potential is there and 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 on come into play and I can't give too much detail on that but there's a next generation potential on the LNG over the road trucking tanks that could could increase 2020 as well.
Okay. Thanks, that's helpful.
Also just wanted to ask it seems like Theres them.
Decent margin expansion implied.
In the 2020 base case outlook.
Just talk through.
Some of Thats mix with with some of the big LNG Cryo content, but can you just talked through at high level, how much is mix so much as self help.
Factors that again.
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 exchangers. 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 pricing.
DNS as well the sourcing savings that that we've achieved already in our in the bag on so thats I wouldn't call that makes I'd call that activities in the bag and ready to go and then there is an element of mix.
On the big LNG projects that give us an absorption benefit so while there are not priced differently than our traditional packages, we get benefit through our facility on absorption, which does help the mix perspective. So I'd say if you were to split it percent self help is 60, 70% of that and then the rest would be a mix.
Got it thanks Walter.
Our next question comes from Eric Stine with Craig Hallum.
Hi, John .
Eric. Thanks, So just wanted to talk about you're targeting the 1 billion of additional Big LNG Awards and I think in the page two of the release talked about second half.
So I mean, given the timing or how you see things playing out I mean, 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 three.
And plaquemines, so any color there would be helpful.
Sure. So the billion. We see include phase one of driftwood for of 375 to 400 million, Okay, with 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 or have the best opportunity to s. I'd in a time.
And we laid out but he took the full gamut of the projects that we know we have content on this number is considerably higher than what you jump.
Okay.
That's helpful. And then maybe just wanted to turn to India quickly. So I know you've got the you're aligned with I'll see all in a GNP. So curious you know I know that the government has I believe its 250 designated areas.
They are looking to build out in the country.
I'm curious I mean, you are to 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.
So there are seven so you're correct, there's actually 300 city gas licenses that are out there right. Now there are seven quote unquote developers two of them being a GNP in iOS yell that have the majority of the gas network regions.
C and AGP, probably as the out of out of the total 300, we'd be in the 40 to 50 somewhere in that range of heading 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 networks, but what we're finding is that.
Actually if that doesn't happen from an animal you perspective, it's actually happening through some of the other activity in the market for example, you.
The Exxon Mobil announcement this week of their annual you with iOS Yale they have other areas that they're developing and they're looking to go too. So there is other avenues that we're having exposure onto some of these city gas network or regions.
Okay. Thanks, a lot.
Thank you.
Our next question comes from Rob Brown.
Good morning.
Yep.
The question or 2020 outlook I think you took the eric's business down quite a bit how is the visibility there what's the backlog.
I would 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 cliff type of situation that theres been a little softening in the last few months, we haven't seen a dramatic drop off ourselves in the in order activity that would.
Say that we should go any further down on our outlook on revenue.
The customers are telling us we have a couple of big customers, telling us. They are seeing 2020 look just like 2019, which is it had been of a surprise given what you here in the market than we have a few other customer, saying, we expect January for everything to take back off so the sentiment of our customer base is X.
Actually more positive than what you're hearing in the market in the areas. There changers place. So we've taken a.
Fairly conservative view on on the revenue side and associated earnings with that but I would I would want to make one other point is that when we did the air exchanges acquisition, we understood where the point in the revenue cycle et cetera. So all the things that we said about air changes when we bought it still ring true gross margin accretive.
Not at the Gate Q3 was nearly 31% gross margin in that business.
Directly accretive to it aro seat or I see by 13% by year, two we still see that happening.
Okay great.
Maybe.
Some more color on an additional 9 million in cost synergies that you've identified there.
What does that consist of.
So we have identified additional.
Opportunities in terms of where we make what and taking cost out there a leveraging our Mexico JV for certain aspects of the building we have.
Already in the bag additional sourcing savings that we have not we had previously included in our model and last but probably not least.
Dakotans 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 with less infrastructure.
Great. Thank you.
Thanks.
Our next question comes from John Walsh with Credit Suisse.
Hi, good morning.
Good morning.
So I guess a question around the balance sheet and the the free cash flow. Obviously, you had very strong.
Conversion.
In the quarter, so a good cash quarter there.
You know I think the leverage.
Still at least last quarter's still sitting in the north of three.
What's the priority right now.
As you think about capital allocation.
And where the balance sheets.
Yes, so our net leverage came down to about 3.22 and at the end of Q3, our priority is to get that net leverage down in the twos, we expect that it'll be at two and a half by midyear of 2020 and it'll decline very quickly thereafter in particular around some of the big LNG cash flows coming in.
I'm 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 out and you do a large M&A style deal, we're just going to drive the drive the debt down.
Got you and then you know looking at Slide 16, I don't know if this is mass we can do because we're just dealing with parts of the projects and.
You know whole numbers and ranges here, but you did anything move you know in terms of the mix you know as I look at some of those projects you call out I mean, if I try to back into what the implied margin is just kind of using your tax rate in your.
And your share count you know they are moving around a little bit.
I didn't know there was just some mix to call out or that's actually math. We can you know we can do because these are just meant to be kind of representative ranges of.
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 of reasons for that we do peanut butter spread certain things. So we don't give our customers margins directly away.
In a lot of that also relates to what's the content on a project. It is it doesn't have a heavy hydrocarbon removal system doesn't have this structure does it have technology. So you you'd be you wouldn't be getting there if you try to back into that using slide 16.
Anything I would point out on that side is the prior look started off of a base outlook from our June 2018, Investor day for 2020, so from a while back and then we walk did in may to get to a range in early 2019 look at 2020.
The current look walks from our expected 2019 up to 2020. So there's there's differences in share numbers, there's all kinds of moving pieces that went into this.
Okay, great appreciate the color. Thank you.
Thanks.
Our next question comes from pressured from JP Morgan.
Hi, Good morning show them, one John I'm extremely cold.
Just.
A couple of follow ups on that slide 16, So if you could help me understand the walk.
It will it seems like from the Thirteeneighty to 1400, Oh Youre deal base.
To the new 16, 15 to 16 80.
Im guessing that harsco that to 70 to 75 came down to something in the low two hundreds just annualizing. Your number there and then I'm guessing the delta to get you to the new number.
That's true is also a little bit of softness in the base business. So.
Just wanted to confirm what what kind of absolute revenue number you're expecting for harsco business next year in the guide.
And I think you said, it's conservative so just so I'm.
I'm guessing, it's probably around where did you 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.
Yes.
Harsco Air Juniors business, we had that model between 190 in 200 on the revenue side, and then with respect to comparing the base business and I'm not sure you can really do that from looking at the prior versus the current because there are two different walks on so I don't we don't have softness in the base business, we're still seeing that 15% growth including Calcs.
In the margin mix is a blended to look here.
Okay I could follow up after.
Maybe just us directly on margins what do you guys assuming for margins in 2020 in the base case outlook.
In terms of gross margins in 2020 were.
Averaged about 30% for the business.
And then for operating margins.
Just over 12%.
Okay. That's helpful and then any update on the free cash flow outlook for 2019, and then 2020, if it's possible to give kind of an early view on that.
So we don't we don't guide to the free cash flow outlook that you can use Q3 of the proxy for Q4, and probably a little bit better than that and then with respect to 2020 on the cash flow is going to be you take 2019 as the base and then you can add a piece of the Kalamazoo projects. These say about 50% of the Calcs you project comes in.
By the first half of the year and then another 25% cash comes by the end of year.
Okay got it and then I may have missed this at the beginning but let me know at least versus our estimates that the DNS west was a little bit softer than than we were modeling and we just mis modeling just curious what you're seeing there if it was in line with your expectations or.
Deviated at all a again could be just mis modeling it.
I think there.
For the quarter from a.
Standpoint, or margin standpoint, I was just talking about like revenue and margin like versus our numbers a little bit softer than I. Just I don't know with your estimates were going into the quarter. So it's tough to say I would feel versus your own expectations. Just curious if you brought any color on that.
Yes, I mean, DNS West was I would say averaged for the quarter in terms of our expectation so didnt.
But it wasn't an epic failure.
From the standpoint of any of the drivers that created a little softness versus what you might as head. So I don't know what your number was but there were two things that we're 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, and then the other pieces, we had a little bit of hold on a China related activity and DNS Wes in particular in its not a big number but we have about $3 million of cryo bio related product that is being held I can't go into the country until the tariff situation is.
Resolved and that's it about 50% margin, so a little bit of impact there to your gross margin number.
Got it helpful color and then lastly could squeeze one and just clean up the other income you reported in the quarter in the piano what what is what is that there's like 3 million of other income.
So 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 not anything unusual in there. It's just the standard activity in terms of Jvs and mark to market.
That is so that's included in the 77 cents I just need to get familiar with how you guys are the adjusted for anymore. That's included in that 77 cents.
That's included in there yet.
Okay. That's helpful. Thanks, Thanks for your can appreciate it.
Thank you.
Your next question comes from Walter Liptak Seaport Global.
Okay.
Yes, I want when this.
[laughter], how one question for the fourth quarter just to understand the timing issue with so the big LNG projects.
I Wonder if we learned anything if these we should expect timing.
Change for venture global in 2020 can this shift around from quarter to quarter, whose anything on percentage of completion than we should be thinking about.
That revenue starts to flow through the income statement.
It's until we have a specific project timeline from the customers themselves anything we give them big LNG is an estimated timing so be very let me be explicitly clear that while we have a project schedule in Kalamazoo, we shouldn't we won't expect that to change, but until we have projects scheduled on anything else.
There's the possibility they do move.
Okay.
And the.
2020 guidance when we're thinking about the low end.
I went down to 45 from cycle.
That's a low end.
Well you know.
How did you want.
That range, you know to get to the low end.
Where would we see the incremental negatives around.
The compressed natural gas and Iraq centers around timing of the big LNG.
But where is the.
Yes. So so let me just step back I think you're trying to walk from the prior which was based off of June 20, eighteens 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 were plus or minus 5%.
What we said in May for the following year I'm. So from the walk go back to page 16, and that's that's exactly where we are right now and how we think about going off of 2019 to 2020. So it's not looking at $5 insides interest for 75.
Here's where we sit today is a 2019 and here's how it gets 2020, but yeah.
Ranges arrange there's a lot of things that go into a range. It I think theres a miss perception that you should take the midpoint all the time.
Things that can happen to get to the low end things that can go to the high end.
So we feel like for 75 is is the low end and breed aren't conservative and five in a quarter would be the stars line based on where we sit right now.
Okay Fair enough and then the a 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 around you know trade related things or is just ended the quarter.
I've tried to give a orders booked.
Yeah, no that actually have you to has a pretty positive sign can is atypical that in the third quarter that the last month for 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 agreement et cetera, 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 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.
Thank you.
Our next question comes from Tom Hayes.
Research.
Hi, good morning, Thanks for taking my questions.
Real quickly Joe maybe on the over the road trucking opportunities is it still remain primarily a european opportunity or is.
Expanded in the U.S. as well.
It's still primarily European Tom on the two other geographies that we've done a lot of leg work on our India and Japan. Our fingers are crossed that one customer in in particular in Asia starts doing a commercial production in late 2020 arms, we have a little bit a line of sight to that.
But nothing that we're able to share yet so the brunt of 2020 will still be Europe .
Okay, and then maybe on a small scale opportunities because we spent a lot of time talking about that today.
Just remind us as far as the timeline.
Backlog perspective through that.
The large LNG projects could be multiple years, if you could just kind of referenced a small scale project might look like as far as timeline.
So 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 were 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 averages about nine months from order to completion of our part of it.
You guys still use percentage of completion accounting for for the small scale.
Depending on the size of the project construction, yes.
Okay all right. Thank you.
Thanks.
Our next question comes from probable shut off with Raymond James.
Thanks for taking my question.
Given that following the harsco deal you have much greater leverage to the North American.
Oil field activity arena than before curious if you've thought about a sensitivity to oil prices. So for example, if w. tie increases by $5 $10.
Right.
Revenue uplift all else being equal should people expect under that type of scenario.
Well, probably it's this is John .
The overall revenue that that's contributing to the segment is still and frankly to do the company is still quite small.
And so we don't see it really shifting things material, one way or the other business actually tends to ship with respect to natural gas production.
So which is driven by oil price growth.
But generally we just don't think that that that that analysis is gonna be.
Something that dictates how the business ultimately flows when 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 weight of the businesses held in now without natural gas production growth growing as much. So I'm just 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 of the business isn't quite move like that.
Okay and in relation to the three kind of upside scenario large projects that you've outlined for 2020.
Do any of those to your knowledge, depending on a resolution of the Chinese tariff on U.S. LNG.
None of them all all have stated that they're not dependent on on the China resolution.
Okay very helpful. Thanks.
Thank you thanks.
Next question comes from Crusher with two brothers.
Good morning.
Yes.
<unk>.
The first.
Yeah.
Got it.
Just to.
Thanks.
We're being conservative on specialty markets.
This is we've tried to give down the middle total guide for 2020, So thats an area that certainly has more potential than what we've built in.
Right.
In terms of the.
Yes.
Yeah.
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Stage.
<unk>.
Yeah.
<unk>.
So.
Ah, yes, those other scenarios could total to around that range certainly.
And that would be.
Okay.
That would be additive yes.
Right.
And I'm not showing any further questions Tom will turn the call back over to delivering.
Thanks as you heard today, we are extremely bullish on the coming years global infrastructure Buildout for LNG as well as excited about the longer upcycle, 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 result, but also to share what is an exciting new deadline for the chart industries of today in the future as shown on slide 18.
Our very own Kim then of energy and chemicals minivans, one or contest, which had 378 suggested slogans that best described chart to our stakeholders. So 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.
Presentation, you may now disconnect have a wonderful day.
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